To infinity, and beyond!

That’s where stocks seem like they’re headed lately. In fact, nearly every indicator of market sentiment is bullish right now. And while an overwhelmingly bullish set of market sentiment indicators is actually a bearish, or contrarian, harbinger of things to come for stocks, it just might not be the case this time. Of course, the most important indicator of all is the market’s price action. Indeed, ever since stocks started rallying in late August, we’ve basically seen the bulls run virtually unimpeded into new high pastures.

Just look at the chart below of the S&P 500 Index. Here we see stocks well above both the short-term, 50-day moving average, as well as the long-term, 200-day moving average. Certainly, there’s been no hesitation on the part of investors to cling to that bullish mood and, hence, the upbeat market sentiment and the commensurate gains we’ve seen in stocks nearly across the board.

Now, I mentioned that under usual circumstances, when sentiment indicators are too bullish -- indicators such as the AAII’s Bull Ratio Indicator and Investors’ Intelligence Bull/Bear Ratio -- it’s usually a sign of a pending downturn. These sentiment indicators are used commonly as contrarian indicators. Well, this time, those sentiment indicators might not reveal a contrarian stance.

According to my friend and colleague James Kostohryz, contributor the website Minyanville.com, those overly bullish sentiment indicators usually are associated with periods where investors already are overweight in equities. As James explains, “In this context, there is greater potential supply than demand for equities -- at a given price level -- for any given incremental change in risk perceptions. This is why equities tend to be near tops when gauges of sentiment and risk appetite are at high levels.”

However, what happens if the market at large is generally under-allocated to equities the way it is right now? As James explains, “They buy equities.”

This is, I suspect, definitely a big reason why stocks keep defying gravity and pushing higher. There are a lot of people out there -- included me -- that have been underweight in equities for a long time, and that now are getting back into stocks with a vengeance. I suspect that our newfound bullishness likely will keep this market humming along nicely -- and that’s a trend you don’t want to miss.

Of course, sentiment and an under-allocation to equities aren’t the only reasons for market optimism going forward. There’s a plethora of reasons why I think stocks are in for a continued run higher in 2011, and I’ve detailed those reasons in the latest issue of my Successful Investing newsletter. If you’d like to find out more about why stocks are likely to go higher, and which sectors are best for your portfolio, click here.