2. Performance anxiety.

Many have predicted that the shift in risk preferences is permanent, and that cash levels will remain high. I don’t think so.

In my view, the average American is simply not going to be able to resist getting back into the market to try to “make back” the losses they suffered in 2009. The average American won’t be able to resist feeling that the Jones’s might get ahead of him, and has been trained to commit money to stocks in a constant and steady fashion. It’s deeply ingrained into the culture, and culture doesn’t change in 6 months. Americans will tend to revert to their trained habits, and are going to feel very uncomfortable being out of the market. 

Institutions similarly simply aren’t going to be able stay on the sidelines, either. Cash positions doom them to underperformance. And for institutions, losing money is far preferable to underperforming.

Hedge funds also have extremely high cash levels. Hedge funds aren’t paid 2% to 20% to hold cash. Soon they’ll be throwing in the towel and aggressively entering “at the market” buy orders.

3. Bearish consensus.

This countertrend rally has been characterized by rising put/call ratios and increasing short interest. In addition, for several weeks there has existed an almost universal consensus amongst analysts -- and technicians in particular -- that the sharp rise since March has been “unhealthy,” and that the market “needs” a correction.

First, the idea that the market “needs” a pullback is nonsense. The market doesn’t “need” anything. And it certainly doesn’t need to behave in a fashion that technicians are comfortable with. On the contrary, the market will tend to move in ways that confound the consensus.

Second, the market didn't pause much on the way down, so why should one expect it to pause on the way up? The technical principle of symmetry would suggest that the recovery will mirror the fall.

Another point: How is it that if a market overshoots to the downside in an “unhealthy” manner, it becomes “unhealthy” for the market to correct this overshoot as quickly as possible? It defies logic. Simple common sense suggests that, if a market reaches extremes to the downside, then it’s “healthy” for the market to correct these excesses as quickly as possible. (To bring the analogy back into its original context, is it “unhealthy” to a gravely ill patient to recover suddenly and quickly?)

The valuation work I present in Your S&P Roadmap suggests that this is exactly the kind of recovery that's happened. What’s happened thus far, is the market has merely corrected an oversold condition reflecting “irrational despondence” toward a level that reflects a more rational assessment. And in my view, the speed with which the market corrects excesses is a good indicator of its health and resiliency.

So, if the consensus is as bearish as I suggest, why is the market going up? The answer: Short-term traders are in cash and/or are betting against the market. Long-term institutional money is moving in -- regardless of the personal views of the managers -- for reasons related to how the industry is structured.

It's my view that eventually, the long-term institutional money that needs to get fully invested is going to overwhelm the traders. And soon, these traders will be reversing positions and going long. At that point, the melt-up kicks into full gear.

Indicators

I urge readers to consult my article Op-Ed: Is a Counter-Trend Rally Inevitable for a list of indicators to monitor. To the extent that these indicators continue to move in the predicted fashion, the rally is still on.

Right now just about every one of the indicators I mentioned has moved as predicted and are signaling a continuation of the rally.