Market Preview: Still Not Convinced

NEW YORK (TheStreet) -- The little guy is still cashing out of U.S. stocks.

Thursday's late surge aside, there's been some signs of deterioration in the low-volume rally of late, and even as the finishing touches are being put on the best start to a year for the S&P 500 since the late nineties, Main Street continues to take money off the table.

Mutual funds investing in domestic equities saw outflows of $1.79 billion in the week ended March 21, according to the latest data from the Investment Company Institute. It's the fifth week in a row that this has occurred, and there's only been two weeks in 2012, basically the beginning of February, when U.S. stock funds saw inflows, and since then, a total of $9.5 billion has been pulled out.

Not a staggering number, of course, but still indicative of retail sentiment. For perspective, mutual funds investing in bonds saw inflows of $5.66 billion last week, ICI said, and a total of $40.2 billion in the latest five weeks.

At this point in the rally -- the Dow Jones Industrial Average is up 7.6%, the S&P 500 has gained 11.6%, and the Nasdaq has risen 18.8% -- a rush into U.S. stocks by retail investors would surely be seen as a contrarian indicator, but it's still interesting that these outsized gains haven't enticed Main Street to seek more exposure.

Going from small investors to small-cap stocks, Bank of America Merrill Lynch voiced some concern about how much further stocks can run earlier this week. The firm's small-cap team noted that the gains the group, which usually moves ahead of the large- and mid-caps and in more dramatic fashion, have enjoyed since the recession are outsized from a historical standpoint.

"Small caps are up over 36% since October 3 when on average they have returned 16.5% in the back half of a recession," B of A said. "For this rally to continue, we think the economic news and earnings growth needs to continue to show strength and we are not sure if this will be the case."

The firm thinks valuations are now a bit stretched -- the Russell 2000 had a forward P/E of 20.3X vs. 13.6X for the S&P 500 as of Friday's close -- and thinks earnings season could present a challenge.