As reported Tuesday, 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%.

Yet evidence suggests skepticism remains high (repeat, high) among many retail investors.

So far this year, just 5% of new savings flows have gone into stocks vs. 50% last year, according to Trim Tabs, which determined that "a good deal of jitteriness remains in investors' minds."

According to AMG Data, another firm that tracks liquidity, equity funds took in $49 billion in the first half of the year, then suffered redemptions of $21.6 billion in the third quarter, due largely to record outflows in September. (Despite the breast-beating after the terrorist attacks, it seems most mutual fund investors properly decided that discretion was the better part of

patriotic investing.)

Save for inflows of $5.2 billion for the week ended Nov. 7, the biggest since early June, retail investors have yet to make a big push back into equity funds, according to AMG; for the week ended Nov. 14, inflows into equity funds totaled $844 million.

Anecdotal evidence supports these figures as well. Recently I polled about a dozen friends to ask their current thoughts on the market, and how their attitudes have changed in the past 18 months (or so).

Not surprisingly, they each said they're less focused on the stock market and feel less confidence about potential gains therein, at least short term.

One friend, whom we'll call "Lou", was trading heavily and actively in 1998 and 1999, including on margin. "No more margin now, and only

about 60% of my money in the market," he wrote.

Lou, who is responsible for the tax department of a multi-billion-dollar international company, frets that "intangibles" such as developments in the war on terrorism are now market drivers, "not just company numbers." Since his expertise is in balance sheet issues and not geopolitics, Lou's "broad-based investing is on hold now."

This jibes with stories from sources at retail shops who say business has remained moribund even during the recent upturn.

The bullish spin on all this is that the equity market has yet to get a big jolt from retail investors, as those trillions in money market assets have remain pretty solidly sidelined.

The bearish spin is that only one of my friends has completely exited the market, and she because of a decision to focus on real estate investments, which some observers believe is another bubble waiting to pop. (Refinancings fell 9.7% for the week ended Nov. 16 after hitting a record the prior week, the Mortgage Bankers Association said Wednesday. Refinancing activity is expected to diminish further as mortgage rates rise in response to the bond market's reversal. On Wednesday the yield on the 10-year Treasury note rose above 5% for the first time since August.)

My friends' dedication to stocks isn't surprising, given that they're all under 40. But the fact most remain convinced in the market's "long-term" potential is evidence of a broader trend that concerns Alan Newman, the oft-bearish editor of HD Brous & Co.'s

CrossCurrents

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Based on the percentage of outflows to net mutual fund assets, nearly $300 billion more would have to come out of equity mutual funds for retail investors to capitulate to the same degree as they did in 1987, Newman estimated.

"A capitulation along the lines of 1987 is the furthest circumstance from investors' minds," he wrote. "But we should certainly expect that at the end of a mania."

While Newman lives at the extreme end of Bear Street, it's noteworthy that AMG Data observed that the majority of fund inflows continued to be "focused toward least risk-averse domestic sectors," notably growth stocks and high-yield bonds.

Count Your Blessings

Recent events have certainly caused many of us to reprioritize and understand what's truly important -- our health, family and friends.

But as millions of Americans celebrate Thanksgiving Day, the subject of the market is bound to come up.

In that light, I'll update what I have said previously: Play along if you feel you can do so intelligently, but don't confuse a trading rally with the start of another multi-year bull market.

Even James Cramer, who has been as rightly bullish as any observer in recent weeks,

warns that the market "will be tricky from here on." My concern is that with the Dow Jones Industrial Average reapproaching 10,000, and all the hype about "technical" bull markets, many retail investors are going to be lured into the market just at the wrong time, as they were in March 2000, or more recently with bond funds and energy stocks.

So far, retail investors have shown themselves to be the true "smart money" by not buying into what Cramer dubbed "the giddiness." If they can continue to avoid the temptation, I contend it will prove to be something else to be thankful for.

Enjoy the bird.

This is the second part of a two-part column, to return to the first part,

click here.