GuruVision: Daydream Believers

The market's rise still has many skeptics, but some investors are starting to believe.
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SAN FRANCISCO -- It's all good, continued.

I received an email from a hedge fund manager in North Jersey who's "not quite yet convinced" a new bull market has begun.

While most traders believe "we're due for a correction ... the only people happy are fully invested portfolio managers right now," he wrote. "This market trades exactly like the late 1998 recovery. Those of us playing catch-up to the averages are being driven nuts because there hasn't been a strong enough pullback. There is a good rotation into different sectors (except oil again) but overall being led by technology."

The manager, who requested anonymity, was heading off for vacation, during which he claims he won't check in on the market.

But if our source peeked at Monday's action, it's unlikely he'd have been surprised, as the

Dow Jones Industrial Average


S&P 500

rose 1.1% each and the

Nasdaq Composite

climbed 1.9%.

After the market's latest bout of exuberance, it's time again to assess the state of investors' psychology.

Clearly, there are plenty of folks who disbelieve and even disparage the market's advance. But with all due respect to

The Wall Street Journal

, it also seems a lot of people are starting to believe.

As Helene Meisler

noted, the Market Vane bullish consensus moved above 50% last week, to 52% from 46% the week before. Other sentiment gauges also showed rising bullishness last week, including:

The Investor's Intelligence survey of newsletter writers, where bulls rose to 44.4% last week from 41.7% while bears fell to 30.3% vs. 33.3% the week prior;

The American Association of Individual Investors' sentiment index showed bullishness rising to 45.5% last week from 34.6% while bearishness fell to 33.3% from 42.3%;

Consensus Inc.'s index of bullish opinion rose to 57% last week from 50% the week prior.

Bullish Signals from Options

Meanwhile, the 21-day moving average of the Chicago Board Options Exchange equity put/call ratio has been heading lower, indicating a rising level of call buying (i.e. bullishness), and entered this week at 0.55.

The 21-day put/call average bottomed at 0.52 in early February and 0.53 in late May, according to Schaeffer's Investment Research in Cincinnati. "If the ratio continues

to decline at its current pace, it will descend to around 0.53 by the end of November," Schaffer's predicted.

If the moving average is able to break through that level it would be incredibly bullish, the firm continued. But if the average again bounces around 0.52-0.53, "then the market will form yet another intermediate-term top and probably drop below the lows set in late September."

Of course, it's not unusual for those with a long-term bearish slant, which has been the case with Schaeffer's since Feb. 27, to view rising optimism as a contrarian indicator.

What is unusual is for market watchers to suggest rising bullishness is a positive sign, as did Paul Rabbitt of in Hermosa Beach, Calif.

"Psychologically, investors lost pessimism last week," Rabbitt wrote Monday, alluding to the aforementioned sentiment indicators. "In the early stages of a market rally, this is a good change as skeptics convert to stock buyers."

Similarly, "economic psychology has changed so that economic bad news is now viewed as old news rather than the prediction of pending economic doom," he noted. "This is also favorable to stocks."

In other words, arguing that bullish sentiment is low and thus contrarian investors should be optimistic, as Rabbitt did in early November, is no longer defensible. But that's "OK" because, again,

it's all good in equity-land these days.

Technically, the market is approaching resistance levels that "normally might be formidable" but "the favorable supply/demand environment suggests sufficient upward bias to push on through," Rabbitt continued, forecasting a 27% return for the S&P 500 in the next 12 months.

Elsewhere, outgoing Prudential Securities market strategist Greg Smith wrote: "It is way too late to be defensive. I think you are going to see a lot of the stocks that got clobbered in the tech-telecom area have very significant year-end rallies. This is where aggressive money ought to be shopping."

Piling On

Brian Gilmartin, who runs $20 million in separate accounts at Trinity Asset Management in Chicago, probably doesn't think of himself as running "aggressive money." But I've long viewed him as a proxy for a certain kind of fund manager who came of age in the late 1990s and never really kicked the technology stock habit. Clearly, Brian's smarter than most of that ilk because he's still got money to manage -- albeit less than at the peak.

While the aggregate return of his funds has outperformed the Nasdaq 100 this year, it is still down more than 20% year to date.

Gilmartin admittedly "missed the rotation into early cycle sectors," but hope springs eternal. He's confident that he "didn't compound the error" by bailing on tech stocks, choosing instead to "pare the number of names" and focus on big-cap bellwethers, which continue to outperform; the NDX rose 2.2% Monday.

Recently, the fund manager has been getting more and more optimistic about tech stocks, notably semiconductors. This despite the

easy money in the group being made, according to John Roque.

"I think we are just getting started," Gilmartin replied Monday when I dared to suggest he's maybe getting a little too ebullient. "I think we are looking at a minimum 20% return in the S&P 500 next year."

Furthermore, he argued that many tech bellwethers are trading at "incredibly cheap valuations," relative to their cash position and cash-generating power.


(IBM) - Get Report

, for example, is trading at eight times its trailing 12-month cash flow from operations, he noted, attempting to counter the talk about "nosebleed valuations."

Without offering specifics, he said the same applies to


(INTC) - Get Report



(MSFT) - Get Report



(DELL) - Get Report



(CSCO) - Get Report



(ORCL) - Get Report


Sun Microsystems

(SUNW) - Get Report

, and


(INTU) - Get Report

. Trinity has long positions in each.

I know this argument is going to send the bears into apoplexy. But for now, all that matters is that Gilmartin -- and those running a lot more money than he does -- believes there's merit in it.

Momentum investing is what momentum investing does.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.