LONDON The question about whether the current equity rally is sustainable or just temporary could be being answered by big investors who are making significant strategic moves toward riskier assets.
Flows out of cash and into equities, more appetite for emerging market bonds, lower prices for insuring bank debt, and strong performances in currency carry trades are all pointing to a continuing financial market recovery.
It is more than simply tactical buying into a rally. In some cases, the decisions being taken by big firms suggest a longer-term commitment to the future.
"The macro picture is improving, financial markets are normalizing," State Street Global Markets said in its latest report on the activities of its institutional investor clients.
It noted, among other things, that there was a broad-based rotation out of defensive stocks similar to that seen at the market lows in 2003.
State Street, in fact, says that it has identified a complete "sea change" by investors within the more than $11 trillion in assets it has in custody.
Since February, the firm says, allocations have gone from an ultra-bearish regime that reflected a broad-based retrenchment through one emphasizing simple safety to a new bullish one that assumes growth.
Big investors are now in the most optimistic and risk-seeking mood that they have been in since May 2008, State Street said, adding that everything pointed to continued support for the global equity market rally.
"Far from running short of oxygen, this rally may yet still be in the foothills," it concluded.
There is plenty of other flow data to back this up.
Fund researchers EPFR Global, for example, tracked net inflows of some $3.7 billion into equity funds in the week to May 6 -- even though that week was plagued by market jitters about swine flu and the U.S. bank stress tests.
Much of this money went into emerging market equities, which indicates growing risk tolerance, but the more significant finding may be where the money came from.
EPFR says that a net $1.6 billion flowed out of money market funds in the week. It is there that large investors park their money when they are fearful of making long-term commitments.
Reuters asset allocation surveys of leading global investment houses have also shown investors draining cash reserves: April's allocation tied with last November's for the lowest since the collapse of Lehman Brothers.
Allocations to stocks in April were at a 2009 high, having risen every month this year.
Away from major assets, meanwhile, there is evidence that sophisticated investors have calmed down a lot about the banking sector, which was a major reason for the risk aversion in the first place.
Alan Ruskin, an economist at RBS, notes that the inverted curve of financial sector credit default swaps has been flattening due to a sharp reduction at the short end.
This essentially means that the cost of insuring bank debt against failure over the short term has been falling as investor fears have eased.
"If financials grease the wheel that is the real economy, it is easy to see where the equity ebullience has come from," he says.
Similarly, carry trades, in which risk-hungry investors borrow in low-yielding currencies to buy higher-yielding ones, have recovered some of the popularity they lost following the post-Lehman flight to safety.
The Australian dollar, for example, has risen around 9 percent against the Japanese yen since the end of March while the New Zealand dollar is up 6 percent.
None of this is to say that a new bull market is guaranteed or even that there will not be another correction.
A lot of analysts argue that stock markets were well oversold when last year's losses continued into January and February.
There are also concerns that current allocations are being forced by a liquidity-driven search for yield similar to that blamed for the last equity market bubble.
"While it seems likely that global stocks will continue to rise and bond yields move higher, we have concerns that these movements are being generated more by rising liquidity than signs of a durable economic rebound," said Steve Barrow of Standard Bank.
But the recent actions of big investors do suggest that while the debate continues over whether financial market recovery is really under way, many have already decided that it is.
(Editing by Ruth Pitchford)