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Valuations are rich. Economic recovery looks, if anything, further off now than it did a month ago. Companies' inventory and capacity excesses aren't even close to getting cleared out.

The bears' case is about as straightforward and cogent as it ever gets -- yet to their distress, stocks keep moving higher. And regardless of what the fundamentals say, market psychology may continue to hold trumps in the months to come.

To begin with, we've entered the best time of year for the market -- November, December and January are the three months with the best returns over the past half century. If there's a real reason for this, it isn't exactly clear. Maybe investors just go into a good mood when the holidays set in, and the cheer doesn't get loosened until February (one of the worst months not just for weather but for the market) sets in. Maybe it has something to do with the alignment of the planets. In any case, there are always people arguing that seasonal factors in the market are either a bunch of hooey, or that other things will override the seasonals, and they're often getting burned.

The Most Wonderful Time of the Year

"Obviously there have been exceptions," says Richard Dickson, a technical analyst at Hilliard Lyons. "But traditionally this is the strongest time of the year."

Despite this, Dickson is cautious on the market, worrying that investors have become overly sanguine. A number of popular sentiment measures (the put-call ratio and the market volatility index -- or VIX -- among them) have been pointing to rising optimism. Once investors are feeling optimistic, the theory goes, the market has priced the good news to come while leaving itself open to bad news.

"The problem," says Todd Clark, head of listed trading at WR Hambrecht, "is that suddenly there's been this change in sentiment from 'This isn't real,' to 'Oh my gosh, I don't want to miss this!'"

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Saying that investors have gotten too bullish, however, is just like saying the market is overvalued. Both may be true, says Fuji Futures market strategist Holly Liss, but there's no rule that says investors can't get even more bullish on stocks, or that stocks can get even more overvalued. "The optimism is too much too soon," she says. "But this could go a lot higher before you get any substantial correction."

One noted short-seller agrees and has so far remained on the sidelines.

"I covered the lion's share of my shorts in September," says Fleckenstein Capital head Bill Fleckenstein, "because I thought there would be a rally as the war went well."

Market Psychology

Fleckenstein thinks many investors have erroneously identified the woes of the American economy and American companies with the Sept. 11 terrorist attacks. In the surprising speed that the Taliban has lost its grip on Afghanistan, and with Osama bin Laden on the run, they see hints of a quick return to growth and profitability at home. "Prices are stupid enough to want to sell," says Fleckenstein, "but I don't know they're really ready to come down. The psychology has to run its course."

All in all, it's not a bad time for a bear to take a holiday. Seasonal factors favor stocks, and things are progressing well for the U.S. on the geopolitical scene. Meanwhile, investors seem perfectly comfortable with the idea that neither the economy nor corporate America's balance sheet are in very good shape right now, and they have been able to shrug off a steady stream of bad reports. Lastly, event risk appears to have moved to the bulls' camp.

As Dickson puts it, "What happens if they come out and say, 'We've captured bin Laden?' I'd be holding back from shorting right now."