Traders are chewing their nails... "To trade or not to trade"

The market was swept up in a wave of relief last week, as traders chewed their nails ahead of both the Federal Open Market Committee meeting and the January non-farm payroll report.

The week certainly didn't start off on the right foot as a number of large-cap companies were taken behind the woodshed following their respective earnings reports.

Yet, some interesting things developed despite this weak start. First, the small-cap Russell 2000 Index (RUT) finally conquered the 800 level. This region has been a nagging thorn in the side of the index since the beginning of December. On Friday, the RUT tagged a new all-time high of 810.35.

Of course, the RUT wasn't the only one making gains. The Dow Jones industrial average hit a new all-time high of 12,683.9 last Friday, while the Standard & Poor's 500 Index notched a new multiyear high of 1,449.33.
Meanwhile, the Nasdaq 100 Trust is holding at support at its 80-day trend line and above peak put open interest at the 44 strike in the February series.

While the market continues to skip higher, we are still seeing signs of growing pessimism among investors. The New York Stock Exchange short-interest ratio popped in January from 6.3 to 6.8 as the number of bearish bets swelled. Furthermore, the odd-lot shorts coming into the past trading week hovered at 6-month highs.

In addition, a recent article in The Wall Street Journal described a huge movement among investors into cash. This certainly raises the question of whether John Q. Investor or John Q. Planner moving heavy into cash is a good contrary indicator. I'd have to say "yes."

Back in the early 1980s, when money market yields reached 17%, fortunes were made by those who either bought long bonds or bought stocks. But the vast majority of investors stuck with money market funds and just sat and watched while their yields tumbled and their principal stagnated.

I'll add that in the mid-1990s (right before the bull market took off), a consensus developed that "stocks cannot compete with 8% bond yields." Is anyone surprised that we are seeing big moves into cash?

One obstacle that remains ahead of the market is the 670 level hovering above the S&P 100 Index (OEX). This region capped the index's rally attempts in late January and again last week. But with pessimism on the rise in the face of the broad market's strength, this is just another roadblock that will likely be hurdled with the same persistence that pushed the RUT through 800.