The stock market is at record highs but investor sentiment is less bullish, Fundstrat's Tom Lee says

• A record-high stock market is typically accompanied by bullish investors, but that isn't happening right now, according to Fundstrat's Tom Lee.
• "Investors are not that bullish, despite new highs in equities," Lee said in a note on Wednesday.
• Investor fund flows since the start of the year have favored bonds over stocks, suggesting there is more upside ahead for the market.
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The S&P 500 closed at record highs seven times so far this year, but investors remain skeptical of the record rally, according to Fundstrat's Tom Lee.

"Investors are not that bullish, despite new highs in equities," Lee said in a note on Wednesday.

Recent fund flows suggest investors are cautious on the markets given that bonds have been favored over stocks since the start of the year, and sentiment has pulled back as well.

Investor sentiment, measured by the AAII Bull/Bear reading, collapsed in January as a mania in reddit stocks like GameStop and AMC Entertainment sparked massive short-squeezes. Sentiment has yet to recover, based on the AAII survey results.

Money market cash also increased for retail investors this year, with an extra $10 billion being added to a total $1.53 trillion cash pile, according to Lee.

And fund flows illustrate that investors are taking their money out of stocks and putting them into bonds, even as the market continues to rise.

"Since the start of the year, households withdrew $7 billion weekly from stocks, favoring bonds at $24 billion weekly," the note said.

Fund flow data from DataTrek Research also suggests investors are fleeing stocks in favor of bonds. For the month of January, investors pulled $50 billion out of equity funds and contributed $121 billion into fixed income funds, according to a Thursday note.

"Fund flows show investors [are] still skeptical of stocks," Lee said, adding that since 2009, only 4% of $3 trillion in fund inflows have gone into equities.

"US households are synthetically short US stocks, given the imbalance of inflows," Lee explained.

The prevalent skepticism in stocks among investors could be fuel for further gains ahead in the market, as investors slowly buy into the idea that stocks can indeed go higher and begin to buy into the rally.

"Investors need to remain tilted positive and buy pullbacks [in stocks]," Lee concluded.

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