Updated from 3:12 p.m. EDT

Picking up where they left off Friday, stocks were down in the early going Monday. Major averages improved markedly after lunchtime on Wall Street, but a wellspring of doubt about the rally's staying power continues to flow.

As of 3:30 p.m. EDT, the Dow Jones Industrial Average was up 66.86, to 8939.226, well above its earlier low of 8756.02. Similarly, the S&P 500 was up 0.55% to 946.06 vs. its earlier low of 943.48 while the Nasdaq Composite Index was recently up 12.42 to 1393.04 after trading as low as 1360.43.

The early weakness came despite another robust report on the housing sector. The Commerce Department reported new single-family homes sales rose 6.7% in July to a record annualized rate of 1.02 million vs. the consensus estimate of 975,000. Existing-home sales rose 4.5% to an annual rate of 5.3 million in July, in line with expectations and up from a revised 5.1 million-unit rate in June and in line with the 5.3 million units analysts were forecasting. A decline in the inventory of new homes for sale helped benefit the S&P Homebuilding Index, recently up 1.5% to 376.77 after having traded as low as 364.99.

Still, some observers were focusing on the negatives, including the downward revision to June's new home sales data (to 953,000 from just over 1 million originally) and 3% decline in new home sales prices.

Further weighing on sentiment this morning were weak same-store sales data from retailers Wal-Mart's ( WMT) and Federated ( FD), as well as ongoing worries about AOL Time Warner's ( AOL) accounting and a J.P. Morgan downgrade of United Parcel Services ( UPS).

Then there's just the generic negativity that seems to have greeted the recent rally.

"Right now the odds suggest we are at, or near, a trading top," Jeffrey Saut, chief equity strategist at Raymond James commented this morning. "The time to get bullish was five to six weeks ago, not after a 1600-point rally."

For the record, Saut did start getting bullish in late July and suggested last week the then-50-day moving averages of 8863 for the Dow, 934 for the S&P and 1378 for the Comp were near-term upside targets. Those levels were exceeded last week, but not by much.

"We think a short-term trading top is here and that the ensuing pullback is going to tell us a lot about the health of the markets going forward," the strategist wrote today. "If the correction is subdued, we should get an extension to the rally," although he does not subscribe to the "new bull market" thesis.

While Saut hopes for a "neutral swinging trading range," others see a far more dire outcome.

"The recent rally exceeded our expectations but the higher-than-expected price levels have not made us more bullish," Alan Newman, editor of HD Brous & Co.'s CrossCurrents deadpanned this morning. They "only reflect our inaccuracy in underestimating the oversold status of the market a month ago."

Despite last week's Investors Intelligence report showing bears outnumbering bulls, "there seems to be a prevailing, all too-willing acceptance of the 'stealth bull market' theory by pros and in the media," Newman continued, suggesting "gross ignorance of the bear market environment reigns."

Citing potential negatives such as another terrorist event, weaker-than-expected economic data or a "hedged derivative event" (not to mention war with Iraq), the newsletter writer claimed: "We are desperate after all these months to turn bullish but can find no conceivable reason to do so."

Putting his money where his mouth is, Newman recommends a short position in the S&P 500 Depositary Receipts ( SPY). He did recommend a long position in Newmont Mining ( NEM), suggesting its 1996 high of $60.75 "could be threatened" if institutional investors decide exposure to gold is warranted. Of late, Newmont was up 5.3%, to $26.47, while the price of gold was up 0.8%, to $311, and the Philadelphia Stock Exchange Gold & Silver Index higher by 4.2%.

Eye of the Beholder

By Newman's own admission "optimism and pessimism are in the eye of the beholder," which is another way of saying sentiment is a relative thing; bears like him see a preponderance of bulls and vice versa for those who've become more optimistic.

"It appears that there is still a substantial amount of investor caution a contrarian indicator in evidence, perhaps enough to help the averages make up some more of the ground they have lost in 2002," observed Thomas McManus, equity portfolio strategist at Banc of America Securities. At 60% equities, 30% bonds and 10% cash, McManus remains among the more defensively postured Wall Street strategists, but he raised his recommend equity exposure twice this summer.

McManus also cited the recent Investor Intelligence data as a sign of ongoing skepticism. But he observed declines in the put/call ratio, CBOE Market Volatility Index and mutual fund redemptions as evidence of "reduced bearishness" among investors.

Later today, we'll look at how the VIX's recent decline, although it was lately up 3.3%, to 33.88, may be misinterpreted as a sign of rising optimism. As commented previously, sentiment is sometimes a hard thing to gauge, especially at nonextreme points as we're in now. Of course, actions speak louder than words and, for many, all that matters is the fund flow data -- at least when it comes to assessing the sentiment of retail investors.

For the month of July, AMG Data Services estimated equity funds suffered outflows of $40.9 billion, the largest since September 2001 and the second consecutive month of equity fund outflows. Meanwhile, taxable bond funds enjoyed record inflows of $17.6 billion in July.

Equity funds had net inflows of $3.2 billion for the week ended Aug. 21, AMG reported, which McManus noted ended a streak of 11 consecutive weeks of outflows, the longest such streak in 10 years.

So perhaps retail investors are starting to warm back up to shares, but that's only after giving them the cold shoulder for much of the summer, suggesting there's a ways to go before bullishness runs rampant again.
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.