Investors counting on the corporate earnings season to provide a major stock lift were likely disappointed when Wall Street lurched up and down this past week.
There is, in fact, a strong possibility that the market has been driven too high by investor overconfidence.
A key measure of investor anxiety, the Chicago Board Options Exchange's volatility index, had been trading in the 20s. But on Thursday, it dipped to 19.63 -- a 52-week low.
Many believe a reading below 20 may indicate investor overconfidence that makes the market vulnerable to future declines. Put another way, it suggests investors may have bid stocks too high by overestimating how strong the economic recovery will be.
The last time the VIX dipped below 20 was last April, at the end of the last bull run before stocks slid to multiyear lows in October. On Thursday, the Dow Jones industrials fell nearly 170 points from an intraday gain of 87 points due, in part, to traders' reaction to the VIX.
"The VIX falling below 20 doesn't happen very often, and that's usually a sign of a market that's topping," said Brian Pears, head equity trader at Victory Capital Management. "A lot of people, particularly short-term traders, take this as a signal that things could become rougher."
Analysts stress that the VIX is just one of many gauges of a market's future direction. Still, there were other signs this past week that Wall Street's stunning rally since mid-March could stall, if not backtrack, despite better-than-expected second quarter earnings.
On Monday, for instance, investors shrugged off a strong outlook from 3M, sending stocks lower as they focused on downbeat profits reports from Merck and Lexmark International. Tuesday also was headed for a loss before news that two of Saddam Hussein's sons were killed lifted the market.
And on Thursday, stocks slid on the VIX reading despite a surprising drop in new jobless claims.
"This is a market that's into the fifth month of the bull. It's tired," said Larry Wachtel, market analyst at Prudential Securities.
He noted that the Dow has climbed more than 20 percent and the NASDAQ has gained more than 30 percent since stocks hit a low on March 11.
"You can't make a move of this nature and then continue upward," he said.
In addition, surging bond yields might be luring short-term traders out of the stock market, while murky corporate outlooks that cast doubt on the strength of the recovery could be prompting others to cash in stock gains.
Analysts say that could forebode more pullbacks, particularly during the quieter summer months when there are few catalysts outside of the earnings season to push the market higher.
"Our stance is that even good earnings for the second quarter are not enough," said John Caldwell, chief equity strategist for McDonald Financial Group, part of Cleveland-based KeyCorp.
"What would get us more excited would be more upward revisions to [outlooks]," he added. "You almost need better-than-expected third and fourth quarter estimates to push the market higher."
For the week, the Dow Jones industrials rose 96.42, or 1.1 percent. They closed Friday at 9,284.57.
The NASDAQ composite index had a gain of 22.20, or 1.3 percent, closing at 1,730.70 on Friday. The Standard & Poor's 500 index advanced 5.36, or 0.5 percent, finishing at 998.68.
For the week, the Russell 2000 index, the barometer of smaller company stocks, rose 4.12, or 0.9 percent, closing at 468.88.