According to an email sent out by Morgan Stanley to clients, their hedge fund clients went from a 43% net long posture last Wednesday to a 47% net long posture Friday. This was after they had been 40% net long on average for the past three months. This email highlights the dynamic at play. The higher the market goes, the more pressure there is to get invested.
Mutual funds and ETFs basically stay invested at all times but hedge funds have huge swings in exposure. These huge swings in hedge fund exposures tend to exacerbate a trend. While few hedge funds would admit to being momentum vehicles, as a group they act much like one would expect a momentum vehicle to act. This leads to seemingly endless rallies and endless declines.
One must respect the possibility of further upside as we have certainly seen examples of such situations in recent years where a market refuses to rest. With that said, I believe we are at a high risk point for some sort of a pullback/correction. It seems to me the bears have given up and everybody is certain QE will take us up forever. Im not so sure but not brave enough to do much about it except stay defensive.