Image: Anthony Mirhaydari

Anthony Mirhaydari

Stocks are on one of the best runs in market history. Thanks to a flood of cheap money from global central banks, the S&P 500 ($INX) has risen in an almost perfect 45-degree trajectory, gaining 25% from the lows of last fall to reach levels not seen since early 2008.

In fact, they've basically doubled from the lows of 2009. Hard to resist, right?

But there's plenty to worry about. Small-cap stocks, the foot soldiers of any sustainable market rally, have been left behind. The generals, glamour issues like Apple (AAPL) and IBM (IBM) have led the charge. Apple alone has been responsible for 20% of the S&P 500's rise, making the rally bigger that it would've been without the guys from Cupertino.

Just look at the chart below, comparing the technology-heavy Nasdaq 100 ($NDX) with the Russell 2000 ($RUT), which focuses on 2,000 smaller, riskier stocks. For most of the market, the uptrend clearly ended in early February. We've been sliding sideways ever since.

PowerShares QQQ Trust ©

That's a scary thing if you're one of the many who haven't jumped into this rally. There are a lot of you. Fund-flow data show the average retail investor has yet to participate in a big way.

I can't say I blame anyone.

This rally followed an epic plunge spurred by the loss of America's AAA credit rating and an "on again, off again" eurozone crisis that never seems to end. After being burned by two cheap-money asset bubbles in a decade, people aren't so quick to chase the next big thing (Apple shares aside). They're afraid to take risks. The investing game seems more rigged than ever, with the rise of shady market practices like high-speed, algorithmic computer trading. And with so many mutual funds and ETFs moving in lockstep, the usual diversification strategies no longer protect from the market's vagaries.

In fact, instead of being whipped into a frenzy by this remarkable run, people have used higher prices to cash out and move to safety. The demographics don't help: Baby boomers are too close to retirement to tolerate another bust, so they're swearing off stocks.

The big question: Can stocks continue to levitate, sucking in these skeptical investors? Or will a new economic downturn shake this uptrend? And based on that, is it time to get in (or stay in) or get out?

Let me try to answer those questions by looking at what might drive stocks up, or down, from here.

Is there money on the sidelines?

The truth is, stocks maintain only loose connections with fundamentals like economic growth and corporate profits. They bounce around what's considered "fair value" based on the two most important things to consider as investors: how much money can be invested and how badly it wants to be invested.

For example, there's nothing to stop Apple from going to $1,000 or more if people are willing and able to pay that price. Sure, you can talk earnings multiples and profit margins until you're blue in the face. But if people really want to buy something, stocks are like any other asset -- including Miami condos circa 2007. They're worth whatever people will pay.

Thus, we have to look at where investable cash has been going -- and how much is still on the sidelines. Both suggest a limited upside from here.

A quick look at data from the folks at EPFR Global reveals that enthusiasm for U.S. stocks calmed markedly in the first quarter -- which matches up with the flat performance of the Russell 2000 over this period. There was simply less buying demand.

Net inflows into stock-based U.S. mutual funds totaled $1.7 billion, down from the $25 billion seen in the first quarter of 2011. In fact, looking just at retail investors, these funds haven't attracted fresh cash since the first week of July 2011.

Instead, the focus for most people seems to be bonds, despite ultralow interest rates that mean little return. U.S. bond funds took in more money during the first quarter than they did in all of 2011, thanks to the massive interest in municipal bonds. With U.S. Treasury bonds offering a negative return after inflation, muni bonds are seen as the next-best thing for conservative investors. These funds have seen money flowing in for 30 consecutive weeks and have attracted nearly $16 billion in the first quarter, versus a $20 billion outflow during 2011.

As for the money on the sidelines, there just isn't much out there, according to Sundial Capital Research. Retail money market assets as a percentage of the S&P 500's market capitalization -- this is essentially cash -- have fallen below 5% for the first time in six years. This measure peaked in early 2009, at around 15%, and has been sliding lower ever since. It dropped under 6% last spring as the overall market, represented by the Russell 2000 or the NYSE Composite Index, peaked.

These are levels that were last seen at the 2007 and 2000 market tops. Moreover, the drawdown over the last few months has taken total money market assets down to levels not seen since 1998.

And mind you, this is at a time when investors are fairly positive on stocks. Total investment in the Rydex Inverse S&P 500 Strategy Fund (RYURX) -- basically, a bet that the market will fall -- has plummeted to lows not seen since last July, just before the August pullback. You can also see it in the way individual investor sentiment, calculated by the American Association of Individual Investors, has remained at or above 60% for the past 12 weeks -- the first time that has happened in eight years.

Given all this, it's hard to see what would cause investors to shift enough money to stocks from bonds, to fuel a continuation and broadening of the uptrend. Bond prices could fall, but that would just push up interest rates at a vulnerable time. The economy is too fragile for that.