While the stock market grinds closer to a three-year high, there also are questions of whether investor sentiment has become overdone and signaling that a top is near.
Sentiment measures are brimming in some cases near three-year highs and in some respects to 10-year peaks.
This while the crisis in Europe continues to brew and earnings — outside of a few stellar performers like Apple , Caterpillar and Netflix — barely manage to beat extremely muted expectations.
So while the averageschurn higher, some think it’s time to take a break.
Walter Zimmerman, senior technical analyst at United-ICAP in Jersey City, N.J., warned earlier this week that the Standard & Poor’s 500 was nearing a peak around the 1325 mark — right where it opened Thursday and where it struggled to break through.
"That’s our danger zone, our high-risk peaking zone," Zimmerman said. "We’re looking at the S&P pushing into key resistance with a bullish sentiment extreme and an extremely overbought market."
Various sentiment gauges are showing bulls dominating the market, often a contrarian sign.
The latest numbers released Thursday from the American Association for Individual Investors indicated the bulls ahead by a whopping 48.4 percent to 18.9 percent margin.
Zimmerman points to the widely followed Market Vane newsletter, which has bulls in the 62 percent range and "consistent with every major top in the S&P in the last 10 years."
"It just adds up to a high-risk environment," he said. "If you see this kind of excess bullish sentiment, history is pretty clear: You want to move to the sidelines."
While investor sentiment has been on a straight path higher, investor behavior has been less predictable.
The 2012 rally has been fed by low volumeand money coming primarily from institutional rather than retail investors.
In its weekly market breakdown, the TrimTabs research firm cites five factors demonstrating that optimistic hedge funds managers and other large market-movers are doing the buying. The case is bolstered by a staggering $932 billion flow into checking and savings accounts in 2011, and a modest $1.2 billion flow into stock mutual funds thus far in January.
The factors are:
1) Plunging short interest.
2) Complacent options buying, demonstrated through a below-average put-call ratio and plummeting Volatility Index .
3) A strongly bullish reading of 42 percent in the BarclayHedge sentiment survey.
4) Investors Intelligence, a survey that gauges optimism among investor newsletters, reports a 51.1 percent bullish trend, the highest since April 2011.
5) The recent Bank of America Merrill Lynch fund managers survey, which showed cash levels falling to their lowest since July 2011.
The firm believes the sentiment is nourished by a belief that the Federal Reserve is about to step in soon with more asset purchases aimed at boosting prices on risky assets.
"The institutional crowd betting on money printing faces two potential problems," said TrimTabs CEO Charles Biderman. "One is that the Fed does not print as much as it expects. The other is that the Fed prints a lot but that its medicine becomes poison, and the benefits of printing no longer outweigh the costs. At that point, the financial system will be in big trouble. If central bank printing is no longer a net positive, who will bail out the system?"
This week’s Fed meeting ended with no definitive statement on when another round of quantitative easing will begin, though many strategists expect this spring will see as much as $1 trillion worth of mortgage bond purchases.
The Fed’s inclination to let inflation rise, in fact, sent one well-known hedge funder to the sidelines.
Keith McCullough had been bullish on the market prior for a few months prior to the Fed meeting, but now has retreated.
In a CNBC interview, McCullough, founder of Hedgeye Risk Management, said Fed Chairman Ben Bernanke’s admission that the Fed won’t mind a little inflation and in fact would foster it at what the central bank considers a healthy level was “lacking any level of integrity from a data-dependency perspective.”
"Growth had accelerated markedly since Q1 of last year, employment was strengthening, inflation was falling, and this guy rolls out the inflation policy," he said. "You’re going to slow growth and that’s why I’m out of the way at this point."
And then there’s Greece.
While the popular market theme has been that Europe will find a way to muddle through — a strategy espoused Thursday on CNBCby JPMorgan Chase CEO Jamie Dimon — a disruption in the liquidity plans would be the only needed wild card to send the market tumbling.
"We think that definitely the tail risk has been removed. But it doesn’t remove the long-term risk, and I’m looking at the end of the year, not just the next three months," Gina Sanchez, director of equity and asset allocation strategies at Roubini Global Economics in New York, told CNBC. "Last time I checked, if you have a solvency problem liquidity doesn’t solve the problem. Liquidity just gets you by. Easy money needs real money."