Bullish sentiment intensified Friday on Wall Street, even amid another round of weak economic reports and scant other reasons to buy stocks.
Market pros have been left to do little else but go with the flow, amid fears of stepping in front of a rally that could last all the way until the November elections. Major indexes rallied nearly 2 percent in afternoon trading.
"This feels like there's been a big psychological switch in just the past few weeks to the point where it's scary how fast things have shifted," said Rick Bensignor, chief market strategist at Execution Noble in New York.
Indeed, sentiment polls across the board are showing optimism among investors even among more weak economic news, including mixed durable goods numbersand flatlining housing sales.
The American Association of Individual Investors reported bullish sentiment of 45 percent in the past week, while bears were at 25 percent—in historical terms a tilt solidly in favor of the bulls. The Market Harmonics Investors Intelligence Survey, which polls investor newsletters, had a similar 41-to-29 edge for bulls.
With unemployment at 9.6 percent and housing still in a slump, it's hard to make a fundamental case for a strong stock market. But investors are parsing numbers like Friday's durable goods report that showed a larger-than-expected drop overall but core strength in business spending.
The key may be that any news that looks even remotely positive is enough to push a market higher that is relying more and more on electronic trading, which in turn feeds off technical indicators. Under those conditions, an oversold market doesn't need much impetus to rally.
"Something seems to be going on that's not macro fundamentally related," Bensignor said. "The news today wasn't particularly good yet the market is screaming to the upside. I attribute this more to the behavioral side of the market. The laws of trading physics urge that we go higher.
The Standard & Poor's 500 is trading well clear of technical resistance, clearing its 200-day moving average by more than 20 points during a month in which the market is rising in nearly historical proportions.
The S&P has gained almost 8 percent in September—historically the market's worst month—as cyclical sectors including information technology (up 10.5 percent), consumer discretionary (9 percent) and industrials (also 9 percent) have led the way.
At a 5 percent gain, financials have been about middle of the pack for the rally, which is suggesting to some not full confirmation of the surge higher.
"The financials have been lagging," says Michael Cohn, chief investment strategist at Global Arena Asset Management in New York. "The fact is, this really is not breaking out anywhere without the financials."
As the market traded in a tight range since the May 6 "Flash Crash" that brought the Dow industrials down nearly 1,000 points at one juncture, Cohn has been among those employing the buy-the-dips sell-the-rallies strategy. He's not as confident about stepping in front of this rally, believing that it is being fueled by anticipation over the November election.
"There's nothing new except maybe the news has for a period of time been benign, so that's letting the market rally," he says. "There is nothing to push on it to get it down. As long as the news remains benign everything will be fine, but I'm not expecting this thing to go much further."
There also could be clues about the market rally in the bond trade.
Treasury yields have been drifting higher, particularly in the 30-year bond, as sentiment slowly grows that the bond rally is losing steam and inflation is beginning to emerge.
Consequently, the hemorrhaging of money out of equity funds and into bond funds has slowed the past three weeks. Equity funds including exchange-traded funds saw net inflows of $3.3 billion last week, according to Lipper data. Excluding ETFs, equity funds had outflows of $332 million.
Hedge fund manager Doug Kass said on CNBC earlier that shorting bonds will be the best trade in the coming decade, particularly if the Federal Reserve's expected renewed attempts at quantitative easing fail.
"There is a possibility that QE2 fails just the way QE1 failed, and the administration will be forced into some sort of transformative jobs program—more fiscal stimulation at the expense of monetary (policy)—and that will provide growth," said Kass, head of Seabreeze Partners in Palm Beach, Fla. "That will be the end of the bond market, I guarantee you."
As for the stocks rally, Bensignor thinks it could last as long as it takes for retail investors, who now make up only a fraction of daily trading, to get back into the game. Even then, the rally could have more legs, but would quickly form a top once investor confidence becomes full-blown.
"They've been burned so many times they don't want much to do with this market," he said. "The more (stocks) move up the more (retail investors) will come back in, which will signal some early point in the end."