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Five reasons stocks are rallying

People buy stocks for all sorts of reasons, or none at all.

But most times, their bet on a rising market is based on one of a handful of rationales.

In this rally to new highs, pretty much all of the common arguments have been working. But for how long? To explore the question, let's meet the five bullish people in this rally and see if their cases still stand up.

1. The "fundamentals are getting better" guy. He'll point out that corporate earnings likely bottomed in the first quarter, results are arriving better than forecast for the second quarter and the second half of the year will feature a return to profit growth. And the U.S. economy has been improving notably across several fronts.

You might call him Rich Bernstein, proprietor of Richard Bernstein Advisors and a chief proponent of the idea that we are re-entering an "earnings-driven bull market" — one that rides a double-digit rebound in corporate bottom lines and requires no help from a higher price-to-earnings multiple.

The Citigroup U.S. Economic Surprise Index has climbed to its highest level in 1 ½ years, and the Atlanta Fed GDPNow reading for the second quarter is now indicating 2.4 percent growth.

The fundamentals guy has a pretty good case, but the trick is to figure out when and at what level the stock market has already priced in the improvement.

2. The chartist who says, "Technicals are flashing a green light." A breakout to a new high after more than a year of sideways-to-down chop has in the past been quite a positive setup. The overwhelming skew of trading volume toward rising stocks in the post-Brexit vote surge is of a sort that also bodes well for the market three, six and 12 months hence.

As Canaccord Genuity strategist Tony Dwyer puts it: "There has been absolutely nothing wrong with the market rally. The new highs in the major indices were confirmed by market breadth, sector breadth, and corporate credit improvement."

And yet, with all that, Dwyer on Wednesday downgraded his market outlook to neutral after holding a positive view for months. This shift is based on the S&P 500 running up against his 2,175 year-end target and the fact that several tactical, technical indicators need to cool off after an 8 percent sprint in less than a month.

He's looking for a "rest" or a pullback that he'd advise using to do more buying, as he sees the market taking another leg higher into 2017.

The technical-oriented folks are encouraged and are blessing the character of this rally, but there's some evidence that stocks may have just about fulfilled their immediate upside potential, in part because seasonal factors turn less friendly starting in August.

3. "Stocks are for yield," argues the dividend seeker. The collapse of the 10-year Treasury yield from 2.3 percent to 1.6 percent has meant that the dividend yield on the S&P 500 has exceeded that of government bonds for months now. A majority of large-cap stocks, in fact, have a higher yield than Treasurys.

This has led to a mad chase for income by way of stocks, especially those perceived to be stable and not particularly exposed to global economic forces. Such sectors as utilities and consumer staples helped support the market while cyclical groups suffered in the "earnings recession." And they've continued to hold up fine as risk appetites revived in recent weeks, thanks to the global scarcity of yield.

That's a pretty rare combination of defensive and cyclical sectors working in unison, and one of the reasons this rally has been "in gear" to an unusual degree.

The question now is how much higher Treasury yields can go without undercutting this salutary pattern. Jim Paulsen, strategist at Wells Capital Management, points out the lockstep advance of the S&P Dividend Aristocrats Index with each downward tick in Treasury yields. He calls the prospect of rising bond yields "the elephant in the room" as inflation measures firm up.

Jeff deGraaf, of Renaissance Macro Research, has also calculated that declining yields have been a dominant factor driving the stock rally overall.

Dividends are great and are a pretty good help in compounding wealth over time. But it will be hard to justify the valuations of some yield stocks if Treasury yields retrace much more of their year-to-date decline. This could just mean a "rotation" into areas that benefit from a firmer domestic economy. But these handoffs to the next runner sometimes aren't executed so cleanly.

4. "The central bank is our friend," according to the Fed faithful. Market expectations for another interest rate boost are near zero for July and at less than 20 percent for September, after the Fed conveyed concern in June about global macro risks and the longer-term potential for U.S. growth.

A sidelined Fed combined with an earnings and U.S. economic-data upturn has been a rare and market-friendly combination. The bond market probably has it right that the Fed is sticking to a pretty high "burden of proof" when it comes to the merits of another rate hike.

Yet this week The Wall Street Journal reported Fed officials' rising confidence in their ability to execute one or even two more increases in short-term rates. While this would happen for "good reasons," it's a sure bet that if Fed Chair Janet Yellen clearly sends the message in next week's meeting statement that she's itchy to act, stocks would undergo at least a gut check.

5. "Everyone else is too bearish," says the self-styled contrarian. For much of the year, snapshots on investor attitudes and positioning have shown a stubbornly defensive posture, and in the immediate shock of the Brexit vote some panicky readings emerged.

With the rally, though, this view has become complicated.

Long-term, "plain-vanilla" institutional investors still seem a bit skeptical and underexposed to stocks. The latest Bank of America Merrill Lynch global fund manager survey, released this week, showed these investors holding the lowest allocation to equities in four years, and a record high percentage of respondents who said they'd hedged to gain protection from a sharp market drop over the next three months.

But short-term indicators of trader and investor mood are showing a good deal more cheer and greed. The weekly Investors Intelligence survey of market newsletter writers showed the greatest incidence of self-professed bulls in 15 months.

The CBOE Volatility Index (VIX) closed below 12 on Tuesday for the first time in a year. While this in itself mostly reflects prevailing market calm and is not a sell signal of any sort, it does show diminished fear among traders and a thinner cushion against possible shocks.

So, not nearly everyone is bearish any more. But after a stock market surge of 9 percent in four weeks and 20 percent in a bit more than five months, who would expect them to be?