Given the stock market's robust second quarter, which ended meekly on Monday, you'd expect market participants to be downright giddy. Judging by most sentiment surveys, the majority are quite ebullient. But such indicators belie an undercurrent of skepticism; certainly there is a sense the postwar rally has largely run its course.

The Chicago Board Options Exchange put/call ratio crept as high as 0.99 intraday Monday before settling at 0.92 vs. 0.70 a week ago. Last week, the major exchanges separately reported that total short interest rose in the past month. In Nasdaq activity, short interest was 4.5 million shares in mid-June vs. 4.3 million in May, while NYSE short interest rose to over 8 million shares from under 7.9 million in May. Meanwhile, put activity in the Nasdaq 100 Unit Trust ( QQQ) continues to be among the most active options.

In other words, if "everyone" is bullish, many are of the hedged/one-eye-on-the-exit kinda bullish vs. the unabashed/pedal-to-the-metal variety. Such skittishness is reflected in the predominance of bears in surveys by RealMoney.com and LowRisk.com. Arguably, sentiment among those trader-oriented surveys could be taken at face value. That's in contrast to the contrarian signals being given by overriding bullishness among surveys by Chartcraft.com's Investors Intelligence and the American Association of Individual Investors.

All this is a somewhat roundabout way of saying many presumably savvy traders are expecting more weakness ahead after the stellar second quarter, during which the Dow Jones Industrial Average rose 12.5%, the S&P 500 gained 15% -- its best quarter since 1998's final stanza, and the Nasdaq Composite rose 21%.

Whether that expectation proves to be a contrarian indicator remains to be seen, but some of the reasons cited for caution are obvious. These include: The market rallied a long way in a short time; there's no sin in taking profits (for those sitting on them); second-quarter earnings and, more especially, third-quarter guidance, may prove disappointing.

There's also the crucial question of the strength of the much-ballyhooed second-half economic recovery.

"All our models and forecasts say we'll see a better second half," Cathy Minehan, president of the Boston Fed, said earlier this month. "But we said that last year." (That delicious quote comes from an article in Saturday's New York Times about behavioral economics.)

The better-second-half scenario got no help from Monday's Chicago Purchasing Managers Index. At 52.5 for June, the index was up slightly from May's 52.2 above the key 50 level, but below consensus expectations for 53. Major indices rescinded an initial rally shortly after the 10 a.m. EDT release of the survey, which bodes poorly for Tuesday's national manufacturing survey from the Institute for Supply Management -- at least for those looking for a "blowout" survey.

After trading as high as 9068.05, the Dow closed down fractionally at 8985.44 on Monday. The S&P 500 finished lower by 0.2% to 974.50 vs. its best of 983.61, while the Comp slid 0.2% to 1622.81 after trading as high as 1643.70.

At nearly 1.4 billion shares on the Big Board and 1.7 billion over the counter, trading volume was decent. But activity is expected to dry up this week as the July 4 holiday weekend approaches. U.S. financial markets are closed Friday in observance and close early Thursday in anticipation (of people leaving early to beat the holiday traffic, one supposes.)

From a technical perspective, skeptics note there were the two reversal days last week, characterized by a session of higher highs and lower lows than the prior session. Also, the S&P 500 closed below its 20-day moving average on Friday, making it more likely a test of its 50-day moving average will occur, as discussed here last Monday . (Heading into this week, the S&P's 50-day moving average was at 953.71. Comparable levels are 8794 for the Dow and 1558 for the Comp.)

Finally, there's been some rumblings about an emerging "head and shoulders" pattern in the S&P 500 on a short-term chart. The neckline on the pattern is at 973, RealMoney.com contributor John Roque noted Monday in a note to clients of Natexis Bleichroeder.

The S&P 500 traded as low as 973.60 shortly after 12 p.m. EDT Monday, before rebounding sharply and then fading again in the final two hours of trading. While quarter-end window-dressing may have played a role in the midday bounce, I contend traders' focus on this potentially critical 973 level was more of a factor. Had that level broken, selling pressure likely would have accelerated. Instead, bears were thwarted once again, although bulls could hardly claim victory on this day.

Those expecting (and hoping for) a decline believe the head-and-shoulders pattern will assert its bearish pull in the coming days. The major debate among traders seems to be whether the decline is stopped at 950 (near the aforementioned 50-day moving average) or continues, and the proverbial wheels come off the postwar rally's bus, which certainly traveled a long distance in the second-quarter.

Kibbles and Tid-Bits

The annual reconstitution of the Russell indices certainly contributed to the aforementioned volume tally. Every year, the Frank Russell Co. reconstitutes its 21 indices in order to "accurately rank the 3,000 largest companies in the U.S. stock market by market capitalization," as the firm's Website proclaims.

On June 13, the preliminary Russell additions and deletions are announced, and the newly reconstituted indices go into effect on Tuesday. The Russell reconstitution is a big deal for index managers, who seek to mimic the indices and thus must sell the deletions and buy the additions. But with the changes well-telegraphed in advance, indexers (and those seeking to get in front of them) are increasingly accelerating the timetable for when they trade the Russell reconstitution.

"People have been doing the Russell since March," quipped Diane Garnick, chief U.S. portfolio strategist at Dresdner Kleinwort Wasserstein. "It's overdone."

Proof of this came Monday afternoon. With about 90 minutes left in trading, companies slated to be deleted from the Russell indices actually were outperforming those being added, said Garnick, noting that she'd never seen that before on reconstitution day. (Of course, firms being added have been outperforming the deletions in recent weeks and months.)

In sum, just as the "January effect" now gets played out in November, the Russell reconstitution is largely a done deal by the time the actual reconstitution date rolls around.
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.