By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) -- Stock prices retain unusual momentum and investor confidence is high heading into a holiday-shortened week, but winded bulls may be ready for a rest, market observers say.

With the Federal Reserve no longer adding assets to its balance sheet, stocks raced to new highs after the European Central Bank and China kicked off new stimulus measures on Friday. The Dow Jones Industrial Average (DJI) and the S&P 500 Index (SPX) both finished the week up 0.5%, while the Nasdaq Composite Index (RIXF) closed up 0.2%.

One remarkable -- and perhaps, unnerving -- thing about how stocks have been climbing lately has been the consistency of the climb. On each of the past 26 trading days, the S&P 500 has closed above its 5-day moving average. That matches the longest streak of closes above the 5-day average in the past 50 years, which was set in March 1986, according to data from Jonathan Krinsky, chief market technician at MKM Partners.

On Friday, the S&P 500 closed at a record 2,063.50. Its 5-day moving average is 2,051.62.

"Given the seasonal trends, and the seeming need for underinvested participants to play catch-up, it seems unlikely we would see what we saw in 1998 (-8% in two weeks)," Krinsky noted. "On the other hand, there continue to be plenty of cautionary flags that suggest upside in the next week or two is unlikely to be great."

With volumes expected to taper off going into Thanksgiving week, average trading volume for November is just over 2% higher than it was this time last year, but slightly lower than this time in 2012 and 2011.

Many underperforming managers are chasing alpha

What's notable about the current volume is where it's coming from, according to Brian Belski, chief investment strategist at BMO Capital Markets.

"A lot of the volume has been coming from underperforming portfolio managers chasing the market up," Belski said. In late September, Belski increased his end-of-year target for the S&P 500 to 2,050 from 1,900.

Large funds certainly aren't faring well. In a recent note, Goldman Sachs said returns on 782 hedge funds with $2 trillion in positions averaged 1% loss on the year, compared with the S&P 500, which is up more than 12%. Even large-cap mutual funds were trailing the S&P 500 with an average 11% return, Goldman said.

Barring any significant news events, expect stocks to move mostly sideways between now and the end of the year, Belski said.

If rising investor euphoria indicates bearishness ahead, then investors should definitely proceed cautiously. Adjusted for inflation, stocks are already back to their pre-dot.com bubble highs.

While rising euphoria may good in the short term, it could very well be a recipe for a holiday hangover. Certainly, retailers aren't feeling very cheery about the holidays.

In the near-term, investors should exercise tactical caution, advises Tobias Levkovich, chief U.S. equity strategist at Citi, in a recent note. Levkovich points out that stocks are flirting with levels of euphoria that result in losses over the next 12 months 80% of the time.

Data from the American Association of Individual Investors backs that up with levels of confidence being the most bullish in nearly four years.

Still a trickle of earnings during Thanksgiving week

With earnings season in the can, a few notable companies will be reporting earnings during the holiday-foreshortened week:

 
Report Date        Company/Ticker (FactSet estimate EPS / revenue) 
Monday, Nov. 24    Palo Alto Networks Inc.   (12 cents / $181.7 million)Trina Solar Ltd.   (14 cents / $642.3 million) 
Tuesday, Nov. 25   Hewlett-Packard Co.  ($1.06 / $28.68 billion)Campbell Soup Co.  (72 cents / $2.22 billion)Hormel Foods Corp.  (64 cents / $2.52 billion)Tiffany & Co.  (77 cents / $968.7 million)TiVo Inc.  (7 cents / $114.9 million)Analog Devices Inc.  (68 cents / $804.8 million) 
Wednesday, Nov. 26 Deere & Co.  ($1.56 / $7.74 billion) 
 
 

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