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Trader Christopher Lotito, center, works on the floor of the New York Stock Exchange Thursday, Oct. 31, 2013.

Richard Drew/The Associated Press

The stock market is losing some of its best friends: bullish strategists.

Just days after the S&P 500 hit a record high and global stocks rose to six-year highs, normally upbeat market watchers have been sounding remarkably cautious about what happens next.

Michael Hartnett, chief investment strategist at Bank of America, warned that market conditions are starting to look "frothy" while efforts by the U.S. Federal Reserve to stimulate the economy raise the risk of "speculative excesses."

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And Edward Yardeni, chief investment strategist at Yardeni Research, noted that "there are mounting signs of irrational exuberance, which could inflate yet another stock market bubble unless the Fed starts to taper. …"

While not a reason to run from stocks, their views add to concerns that this year's stock market rally may be stretched.

The year-to-date gain for the S&P 500 is about 24 per cent, putting it on track for its best annual performance in a decade.

In Canada, the S&P/TSX composite index in October enjoyed one of its best monthly rallies since the market began rebounding in 2009.

There isn't a whole lot driving the rally, though, beyond a widely held belief among investors that bad economic news is good for the stock market because it keeps the Fed in stimulus-mode.

The Fed, wrestling with a slowing housing sector, high unemployment and chronically low inflation, indicated this week that it is nowhere near a decision to pull back on its bond-buying program, despite openly mulling a move away from stimulus in the summer.

Many economists now believe that tapering won't start until January at the earliest, with some forecasts pushing the date out to mid-2014.

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But the bad-news-is-good-news shtick only goes so far, which is why some bulls are now tempering their enthusiasm for stocks.

Mr. Hartnett had been far more optimistic at the start of the year, when he argued that a widespread rotation out of bonds and into stocks would fuel gains in the equity market.

He thinks this rotation will continue (he is a bull, after all) and sees additional support for stocks coming from relatively high cash levels among professional money managers and a seasonal lift that tends to arrive in the last 10 weeks of the year.

However, he also believes that valuations are high by some measures. Most of the world's stock market indexes – including the S&P 500 and the S&P/TSX composite index– are trading above their 50-day and 200-day moving averages, indicating that markets may have risen too far, too fast. As well, U.S. stocks are valued at 1.12-times U.S. gross domestic product, which is high by historical standards.

"The measure is at the very least a reminder that growth in 2014, rather than liquidity, is essential to prevent an overshoot of the equity market," Mr. Hartnett said in a note.

Mr. Yardeni, who has also been enthusiastic about stocks this year, sounds similarly cautious about where they are now headed. "If the market continues to soar to new highs while the fundamentals remain weak or deteriorate, then at some point the bad news will be bad news," he said in a note.

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MarketWatch's Mark Hulbert, who tracks sentiment among newsletter writers, believes that irrational exuberance "is very much in evidence right now."

Similarly, the weekly sentiment survey from the American Association of Individual Investors shows that bearishness recently dipped below 20 per cent. That is near the low end of the past decade and well below the long-term average of 30.5 per cent.

In other words, small investors have already joined the rally, leaving little potential upside ahead – and growing dangers.

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