Market Heeds Caution Signs

Institutional fund managers also are feeling cautious. Portfolio managers ratcheted up their cash balances in March to 4.4% from 3.8%, according to Merrill Lynch's Global Fund Manager Survey, released last week. Their risk appetite, measured by Merrill's Composite Indicator for Risk Appetite, also fell five points in the month, to its lowest reading in five years.

That said, fund managers do not believe a recession is at hand, nor have they abandoned their positions in equities, according to the survey. Indeed, the managers say they plan to put their new cash balances to work in the stock market.

Citigroup's Smith Barney unit polled affluent clients, revealing investors are only moderately less optimistic about the investment environment after the recent bout of volatility. Those who believe this year is a better investment climate than last year fell to 45% after the market's decline, vs. 52% prior to Feb. 27.

Meanwhile, hedge funds are "significantly net short stock," writes Mary Ann Bartels, technical research analyst at Merrill Lynch. She notes that the Russell 2000 reached record net short levels last week. Excessive short positions like this "mitigate downside risk," writes Bartels. Short-selling represents unrealizedbut guaranteed demand in the market, as these investors are forced to cover their positions by buying the security they've shorted under certain conditions.

As more data stream in, more minds will be made up. As for right now, the mind of the market might just need a vacation.