Gauging sentiment is tricky. But accurately assessing investors' collective mindset is crucial in determining the sustainability of the rally from the mid-March lows. Join us, then, as we enter The Sentiment Zone.

Surface indications suggest the investing public is relinquishing the hard-earned skepticism of the past 15 months or so, and starting to match the ongoing bullishness of Wall Street. That has potentially widespread implications, as money from individuals could provide another boost to the market.

"If companies are buyers

of stock and individuals become buyers, that's what we call a bull market: more money chasing fewer shares," said Charles Biderman, president of TrimTabs.com Investment Research in Santa Rosa, Calif.

Indeed, Biderman believes a new bull market has begun, noting TrimTabs' "L1" metric has been net positive by $7 billion since mid-March. (L1 is derived through a formula that incorporates new stock offerings plus insider selling minus cash takeovers and share buybacks.)

Year-to-date, new stock offerings are down over 50% from the $70 billion total through mid-April 2002, while companies have been "aggressively buying their own shares and other companies for cash," he said.

On the other hand, the public historically has been bad at timing the market. Inflows into tech and telecom funds peaked in early 2000, and overall inflows into all equity funds were a record $309 billion that year. Thus, the public's heightened interest of late might signal an intermediate top, if not something more nefarious. (

Newsweek's

recent recommendation that Americans should be "rethinking buy and hold" might have contrary implications.)

Flowing In

The numbers do suggest Main Street's optimism is rising. After suffering the first year of net outflows since 1988, equity mutual funds suffered additional outflows of $371 million in January (a rarity for that month) and $11.1 billion in February, according to the Investment Company Institute (ICI).

March saw modest equity fund inflows of $1.2 billion, according to AMG Data. After tailing off in late March, inflows resumed again in early April. Inflows of $5.7 billion for the week ended April 16 brought the four-week moving average to $2.1 billion, its highest level since May 2002, according to Banc of America Securities. (Notably, equities slid precipitously after peaking in mid-May 2002, a reminder that mutual fund inflows are often good contrarian signals.)

Late Thursday, AMG reported equity funds enjoyed additional inflows of $801 million for the week ended April 23, although the bulk was into international funds. Meanwhile, the American Association of Individual Investors' Web site showed members' bullishness leapt to 63% as of Thursday, the highest level since Nov. 29, 2001, and up from 46.3% on April 17. (Recall that the bulk of the post-Sept. 11 rally had occurred by late November 2001.)

Biderman agreed the public is wrong "at extremes," but said the recent spike in inflows is "tolerable" because corporations are also buyers.

Tax Man Cometh

Meanwhile, some say it's too soon to assess whether the public really is back in any significant way.

The $5.7 billion total for the week of April 16 was the largest weekly inflow since (

ta-da

) the week including April 15, 2002, observed Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis. The implication is that much of inflows are coming from individuals funding IRAs and other tax-related investments.

"The true test of retail investors is whether mutual fund flows see some long-term consistency," Belski said. "You need to see steadier returns over time and I don't think a one-month gain of 8% in the

S&P 500

is going to make people jump back in."

What's less in dispute is the ongoing optimism of professionals. As of April 1, Merrill Lynch chief U.S. strategist Richard Bernstein's sell-side indicator -- a measure of strategists' recommended allocations -- was at 65.7%, unchanged from the previous month. "Wall Street strategists continue to believe the current environment represents one of the best times to buy equities in the past 18 years," Bernstein wrote.

Crucially, the sell-side indicator has been above levels indicating extreme bullishness every month since late 2001. (See

this story for more on the indicator, including its predictive value.)

Meanwhile, indicators of fear, such as the CBOE Market Volatility Index, have tumbled precipitously in the past six weeks, with the VIX hitting its lowest level since May 31, 2002, on Wednesday. More dramatically, its

Nasdaq

counterpart recently hit its lowest levels since 1999.

Finally, the liquid assets of mutual funds (a.k.a. cash position) were 4.3% in February, according to ICI. Fund managers were apparently eager buyers early in the year, and market action suggests that has intensified in recent weeks.

"Institutional

money managers are engaged because the market is going up and they see an atmosphere where they can capture returns," Belski said.

Slowly, perhaps grudgingly, the public seems to be reaching a similar conclusion.

Subtleties of Sentiment

As noted earlier, gauging sentiment is tricky. In part, that's because there are so many different ways to measure it. Also, because sentiment is considered a contrarian indicator, people tend to see what they want to see. In other words, bulls think "everyone" is bearish, which would be favorable for shares.

To wit, Tobias Levkovich, senior institutional U.S. equity strategist at Salomon Smith Barney, who's been upbeat on shares for some time now, recently opined on what he dubbed the "irrational despondency" among investors.

Conversely, hardcore bears see a world of cockeyed optimists.

The "huge swell of optimism from mutual funds," as evinced by their low cash holdings, is "pathetic to watch," laments Alan Newman, the oft-bearish editor of Longboat Global Advisors'

Crosscurrents

.

Newman has written extensively about how the level of outflows from mutual funds since the peak in 2000 has not nearly approximated that which occurred after the 1987 market crash, a point he reiterated Thursday. "I don't think we've seen the type of capitulation that for me would mark the end of the bear market," he said. "The consequences of the mania are going to take many years to unfold,

but at some point the public says 'the heck with it,'" and abandon stocks more dramatically.

Still, Newman's negativity was somewhat tempered vs. past discussions, conceding the public's ardor for shares has obviously diminished since the heyday.

"The public got screwed in so many ways," he said, fittingly, given myriad headlines this week have reminded investors of the corporate and Wall Street scandals of recent years, and newer ones emerging.

In assessing the current psychology of individual investors, Newman believes they've been "brutalized by what has happened since peak of mania," but are "kind of hoping it's all been a bad dream

and that things will go back to 'normal' and be great again."

Anecdotal evidence such as discussions with friends and family, plus reader emails, suggests to me Newman is correct. While many individuals have "sworn off" stocks, there continues to be a belief that stocks are the "only option" for long-term retirement accounts such as 401(k)s and IRAs.

If sentiment is as powerful an indicator as many think, that persistent faith in shares suggests the true "give-up" phase of the bear market has yet to occur, even if sentiment points upward in the short term.

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

Aaron L. Task.