Two big forces could thwart this clockwork stock rally

The market’s humbling of the bears has pulled many converts into the bullish crowd. Even those strategists who have correctly been positive on the market are flagging some surveys of professional investors that show optimism rising toward levels that can be a restraint on further short-term upside.

Jeff deGraaf of Renaissance Macro says: “The latest Investors’ Intelligence and Consensus Inc. [survey] figures show 90-100th percentile readings in bull categories. Simply put, this shows that there are more bulls than bears in the market right now. With the market showing green lights across the board, this represents one of the few headwinds.”

Other gauges of mood, such as options activity and low cash levels in retail and institutional brokerage accounts, also support the idea that folks are generally positioned for further record highs.

And, sure, there are elements of the rally that arguably smell of “culmination” rather than a fresh, peppy departure for more distant points higher.

The S&P 500 seems to have a date with the 2500 level, up just another 1 percent, a nice round number that’s two-thirds higher than the 1500 mark that capped the market for 13 years. The tech sector just reclaimed its year-2000 high. The Nasdaq just completed a rare 10-day win streak.

S&P 500, 1 year

But none of this flashes brightly as a sign of rampant speculation or headlong euphoria, and is countered by abiding signs of caution: Wall Street strategists’ targets remain muted, retail inflows to stocks are inconsistent, and Friday saw the third-highest volume in five years for options bets that the VIX will rise (implicitly a bet on more market turbulence with a downside tilt).

This is no longer a hated bull market, and it doesn’t necessarily owe investors much more, but the sentiment setup right now argues more for a pause or that long-awaited pullback than a serious peak. Markets tend to weaken and get jumpy before they make a top, and this one hasn’t yet.

European stocks, consensus darlings right now, have shed more than 4 percent from recent highs as the euro has surged. And stock reactions to U.S. earnings results so far has been skewed toward “sell the news” so far this reporting season.

These are things to monitor for a potential change in market character. It’s far too early to say that one is truly at hand. But the approach of August, with investors feeling more comfortable, is the time to start listening for the gears starting to slip on this low-gear market.