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What a Week: Balky Bulls

Aaron Task

Bulls found themselves swimming in a sea of joy this week as (mostly) upbeat economic, earnings and M&A news helped secure more milestones for stock proxies.

But even amid the Dow's string of record closes and multiyear highs for broader averages, skepticism about the rally remains high, suggesting the advance may not be done just yet.

For the week, the Dow rose 1.1%, ending Friday at 13,264.62, its seventh record close in the last eight trading days. The S&P 500 gained 0.8% for the week, closing Friday at 1505.62, its highest level since September 2000. The Nasdaq Composite rose 0.6% for the week and closed Friday at 2572.15, its best close since February 2001.

Most of this week's gains came Tuesday and Wednesday when the news flow was overwhelmingly positive, highlighted by News Corp.'s(NWS) blockbuster bid for Dow Jones(DJ), a private equity takeover of Cablevision (CVC), and stronger-than-expected earnings from the likes of MasterCard (MA) and Yum! Brands (YUM).

Such positive corporate news was augmented by stronger-than-expected reports on ISM manufacturing Tuesday and factory-orders data Wednesday. Thursday brought strength in ISM services and a better-than-expected report on first-quarter productivity, but those positives were offset by earnings tilted toward the negative.

A soft April jobs report Friday, meanwhile, was offset by news of another potential mega-merger: Microsoft's (MSFT) reported $50 billion bid for Yahoo! (YHOO), which jumped 10% on the speculation. Meanwhile, Reuters (RTRSY) soared 27% on news it has been approached by Thomson (TOC) about a possible combination.

In the midst of this historic rally, one question keeps coming up: Where are the wild-eyed bulls?

"We're hearing many people saying 'the market is overextended, it's too good to be true,'" Steve Porpora, managing director of floor operations for William O'Neil & Co., says in an interview on TheStreet.com Friday. "It's all good stuff. You always want some negative sentiment in the marketplace to keep some money back."

From a contrarian perspective, the fact that more investors are getting more skeptical as the market rallies is a bullish sign and is very different than 1999, for example.

Back then, retail investors were plowing money into U.S. equity funds at record levels. But after some modest inflows the prior two weeks, domestic funds reporting net outflows of $5.41 billion for the week ended May 2, according to AMG Data. The most recent week was more in keeping with recent fund flow trends.

"Both domestic and international fund flows displayed a significant decline in March, as U.S. fund flows were $1.61 billion, compared to international fund flows of $6.59 billion," reports Citigroup chief U.S. equity strategist Tobias Levkovich. "Moreover, in [the first quarter], total stock fund flows were down about 30% from [first quarter 2006], with U.S. and international flows both recording a similar year-over-year drop."

On a related note, the American Association of Individual Investors' latest weekly survey shows only 28.5% of respondents are bullish while 54.3% are bearish, the latter at the same level as last July's lows.

Negativity among retail investors likely reflects the harsh memories of the bursting of the late 1990s bubble and today's concerns about rising gasoline prices and the housing market's slow-motion train wreck.

Disappointing results and/or guidance this week from retailers Sears Holdings (SHLD), OfficeMax (OMX) and Under Armor (UA), as well as automaker General Motors (GM) revived concerns about the state of the U.S. consumer and the impact of the housing slowdown. More so after Monday's lackluster reports on personal consumption and pending home sales, as well as Friday's payroll data.

In addition to retail investors, "traditional institutional investors are still cautious," Levkovich said Friday in an interview on TheStreet.com TV. "People aren't chasing the market. It's the reverse -- they're backing away."

Even some typically bullish market strategists have gotten more cautious as the market has rallied.

"On the short term, we have backed off our aggressive buy strategy just slightly," Don Hays of Hays Advisory wrote on Wednesday. "We have put it in neutral and have done ever so slight pruning, but aching to put that smidgen of cash back into stocks." (Italics added, lest anyone be confused about Hays' perspective.)

On Thursday morning, Al Goldman of A.G. Edwards was quoted in The Wall Street Journal advising investors to "hold off" on putting money in the market. The same day, CNBC had Eugene Peroni talking about a possible 3%-5% near-term retreat.

No one would ever confuse Hays, Goldman or Peroni for Doug Kass, so I ask (again): Where are the wild-eyed bulls?

They're absent on the sell side too, according to Seeking Alpha, which reports sell-side analysts currently "rate a lower percentage of [S&P 500] stocks as buys than at any other time over the last 10 years. It appears as though the closer the S&P 500 gets to its old highs, the less likely analysts are to embrace this bull market."

Levkovich, for one, remains upbeat about stocks, sticking with his year-end targets of Dow 13,800, S&P 1600 and 888 for the Russell 2000.

"We keep hearing 'the markets run too far,' but it's been legitimized by earnings," he says.

With about 80% of the S&P 500 having reported, first-quarter earnings are coming in at 12%, according to Bloomberg. Firms are not only whipping the consensus estimate of 3.2% year-over-year growth from April 1, but they're also topping the consensus from January of 8.4%, Levkovich notes. "People were just way too cautious on the earnings front."

That caution remains the watchword for many, after another week of gains suggests money remains on the sidelines -- or actively short -- and that the rally may not have breathed its last just yet.