Bears on the Brink: 'I Can't Fight It Anymore'

Though it's already a few weeks into winter, Wall Street bears may be finally ready to hibernate, though no doubt against their will.

A powerful rally in which virtually all fears have been bypassed has pushed stock market detractors to the brink, ready to wave the proverbial white flag as the only direction for the market seems to be up, up, up.

"They're almost ready to throw in the towel," Scott Bauer, of Trading Advantage, told CNBC. "I don't want to say 'capitulation,' (but) guys down here really are saying, 'All right, I can't fight it anymore, let's go.'"

The term "capitulation" refers to the point when sentiment has gone so far in one direction that a turnaround, be it higher or lower, is a certainty. (Read More: S&P 1,500: The Last Barrier Before a New Record?)

One of the most respected maxims on trading floors is that bull markets end on good news and bear markets on bad news. In simpler terms, that somewhat counterintuitive observation means a run higher stops when the market no longer reacts positively to good news, while a run lower halts when the market no longer falls on bad news.

Lately, the news has been mostly good, if only marginally so.

The worst of the fiscal battles in Washington have abated for the moment, and companies have managed to beat sharply lowered earnings expectations. The European debt crisis is on the back burner, and geopolitical tensions, particularly in the Middle East, have quieted.

Still, any one of those substantial market headwinds could start blowing again on a moment's notice, worrying some that the current rally is heading for trouble. (Read More: Why Tech Earnings Could Decide Market's Direction)

"We are reaching capitulation levels," said Walter Zimmerman, senior technical analyst at United-ICAP. "What troubles me is there's never been a happy ending from that combination of extreme complacency."

Indeed, many of the metrics that gauge market sentiment are in startling territory.

The CBOE Volatility Index, an options measure of market fear, is around the 12.5 range. The VIX, as it is called, has only traded below 14 about 21 percent of the time in its 21-year history and has closed below 10 just nine times in nearly 6,000 trading days, according to Nicholas Colas, chief market strategist at ConvergEx.

"The bottom line here is that at current levels you must – repeat MUST – believe that macro concerns (Euro, debt ceiling, China, whatever used to keep you up at night) are no longer an existential threat to either the global economy or to corporate earnings," Colas wrote in a recent volatility analysis. "And if you cannot get your head around that benign scenario, you must – repeat MUST – treat current equity prices with real caution."

Stock Trader
Scott Eelis | Bloomberg | Getty Images

Market professionals, as measured by the Investors Intelligence survey of investors newsletters, are bullish by a 53.2 percent to 22.3 percent margin, the largest spread in four months. The last time the gap was this big preceded a 7 percent market drop in a month, which in turn preceded the current rally.

Hedge fund titans David Tepper and John Paulson separately made strongly bullish statements this week, while mutual fund flows also have changed direction, with equity mutual funds taking in $3.8 billion last week.

Finally, the more than 470 days the market has gone without a correction - or 10 percent market drop - marks the 10th longest such streak in market history and the best run since the record 2,553 days that lasted from 1990-97. Three-quarters of the Standard & Poor's 500 stocks are in overbought territory, according to Bespoke Investment Group.

"If the market keeps moving higher, not worrying about anything, it's going to be difficult for the bulls," said Quincy Krosby, chief market strategist at Prudential Annuity. "The market's not climbing a wall of worry - it's not worrying about anything. Typically when that happens something will come along to pull it back."

That, of course, is easy to say, and it's easier still to predict that at some point the rally will get thwarted.

How long that will take and at what point investors ought to pull some cash off the table is much more difficult to forecast, made all the harder because the bears are fighting the indomitable Federal Reserve and its money printers. The Fed has injected nearly $3 trillion in liquidity already and is promising another $85 billion a month until it deems the economy safe enough to run on its own. (Read More: What Will It Take to Get the Fed to Stop Easing?)

So this earnings season is treated as good news, even though fully 70 percent of all companies on the S&P 500 have lowered their first-quarter outlooks, and fourth-quarter profit is a paltry 3 percent against expectations of 11 percent just a few months ago.

It all comes down to another time-honored Wall Street maxim: Don't fight the tape.

"When everyone jumps in and valuations get frothy, that usually is the beginning of the end of a bull run," Krosby said. "You can't fight the tape, but you want to be more cautious. The higher it goes, the more cautious you want to be."