Bull Case Gets Louder

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Bulls reached for higher ground and found it Monday, with the

S&P 500

touching a four-and-a-half-year intraday high. How much higher can this market run?

It might sound ominous to have stocks trading at levels last seen when the tech bubble was in the early stages of letting some air out.

With minor setbacks here and there, stocks have been climbing steadily since October. The S&P 500 has gained nearly 10% since its Oct. 12 low.

A strong advance in January was followed by some weakness amid a disappointing fourth-quarter earnings season and high-profile disappointments, notably in the tech arena.

There were also hesitation about the direction of monetary policy and uncertainty about the arrival of Ben Bernanke, who replaced Alan Greenspan at the helm of the

Federal Reserve

.

Contrarian investors, who believe that it's nearly time to sell when bullishness gets too high, took heart in this restiveness.

Investors Intelligence

polls were showing bulls outstripping bears by 2 to 1 for several weeks -- but that changed last week, with 45.3% of those polled feeling bullish vs. 29.5% feeling bearish.

The CBOE volatility index, or VIX, which usually surges ahead of big upward market moves -- often presaging a market swoon afterward -- has remained at very low levels. On Monday, the VIX dropped 0.4% to 11.43.

"There's good arguments on either side of the bull-and-bear debate at the moment," says Chris Johnson, market strategist at Schaeffer's Investment Research.

In the bearish camp, one will find concerns about the lackluster fourth-quarter earnings season, still-elevated energy prices and the cooling housing market. These concerns all center on whether the Fed will continue to hike interest rates for much longer.

On Monday, a bigger-than-expected drop in new-home sales in January failed to affect sentiment much beyond the housing sector. The Philadelphia housing sector index dropped 0.7%.

But stocks were moving higher amid a spate of mergers and as crude prices dropped sharply. Home improvement specialist

Lowe's

(LOW) - Get Report

reported stronger-than-expected earnings and issued bullish guidance, helping investors digest the drop in home sales.

The

Dow Jones Industrial Average

rose 35 points, or 0.32%, to 11,097. The S&P 500 gained 0.4% to 1294 and the

Nasdaq Composite

advanced 0.8% to 2307.

Intel

(INTC) - Get Report

rose 1.6% after a broker upgraded the stock on confidence it will benefit from chip sales for

Apple's

(AAPL) - Get Report

new notebooks .

On the bullish side, one finds first and foremost the paucity of sellers in the market. As noted by

RealMoney

contributor Jim Jubak in a recent column, "stocks go up when doubting investors are converted into buyers."

After resisting for quite a while, it seems retail investors are starting to join the party. According to TrimTabs Investment Research, equity funds that invest primarily in U.S. stocks saw inflows of $1.2 billion in the week ended Feb. 22, compared with outflows of $600 million the previous week. Popular exchange-traded funds also had inflows of $6.5 billion during the week vs. outflows of $383 million the prior week.

However, these inflows are not yet telling the smart money to abandon ship, according to Johnson. "The sideline money is becoming available and the cash is coming back into the market," he says. "But we're in the middle of this trend, not the end."

Technically, Johnson notes, the S&P 500 is trading above its 50-day moving average, which is the line of demarcation between buying or selling for a lot of institutional players. Above the 1300 level, which is about 6 points away, there is very little resistance.

The strategist also takes heart that the

Nasdaq 100

, which gathers the largest stocks in the tech world, outperformed the rest of the market, including the Nasdaq, rising 1.14% on Monday.

Johnson looked for Nasdaq 100 stocks that were moving above their 50-week average and found 47 of them. However, he noticed that these accounted for only 30% of recent price action in the market-cap-weighted index. The other 53 were therefore the largest-caps, the likes of

Microsoft

(MSFT) - Get Report

and Intel, and they had kept a lid on the index, Johnson says.

That the Nasdaq 100 began to outperform on Monday tells the strategist that money is starting to pour into these stocks as well, as seen in

Google's

(GOOG) - Get Report

3.4% rise Monday.

Of course, with Google back in the game just as animal spirits and retail investors come back to life, volatility is likely to increase and a market top might be just around the corner.

But with the next Fed meeting and earnings warnings season not until the end of March, there's still room for more gains.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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