THE bullish behaviour of the sharemarket in recent months and particularly for the past nine days suggests we are in a "risk on" phase - in other words, investors are pulling money out of the saver haven, the bond market, and putting it into shares.
It has been a couple of years since the market has witnessed such positive sentiment, and Tuesday's rise took place despite a weaker lead from the US market.
The market has been edging up for a couple of years but without gusto and volume. Thus the question needs to be asked: what has changed the sentiment?
In theory, shares should rise in response to a belief that corporate profits will grow. But there is little hope that earnings will improve in proportion to the gains made recently on the ASX. When the interim profit season reports come through over the next few weeks they may be better than current expectations but they won't be strong. Some companies will post robust earnings, but plenty will be treading water or doing well just to stabilise profit falls.
Manufacturing, retail, construction, tourism and aviation (to name the obvious few) are still struggling and the companies engaged in these industries will not fare well in the coming reporting season, therefore the recovery in the market has almost nothing to do with profits getting better - it is virtually all sentiment driven. So are we just redefining what we consider to be appropriate price-earnings ratios?
There are a bunch of external factors that are playing into this: the immediate risk of a European financial implosion has eased and the prospect of falling off the US fiscal cliff has been averted.
But the US recovery is tepid and there is general recognition that Europe will not grow for years. Both still have massive debt problems that need to be dealt with.
The only real positive is that recent data out of China suggests that its growth rates may be starting to recover, but these are very early signs.
The revival in sentiment appears to be about mitigation of the negatives rather than the appearance of the positives, but this has a flow-on effect. The sharemarket is making us wealthier and so is the property market, which is also showing signs of gains.
Investors are therefore increasingly prepared to take a bet on shares - which pushes up prices and, in turn, serves to reinforce that confidence.
But are businesses and consumers bullish enough to translate this sentiment into action or just take a punt on the market?
The latest business confidence survey by the National Australia Bank released on Tuesday answers that question. While it posted a sharp increase in December, it was all about those external indicators, like aversion of the European debt crisis and the US fiscal cliff. A more thorough read reveals that businesses are still concerned about forward orders and future capital expenditure.
There is nothing in any official or unofficial data to suggest that companies are prepared to invest. The mining industry spending spree that has been sustaining the economy for the past couple of years will peak this year.
The improvement in commodity prices - in particular iron ore - has resulted in an overdue rerating of large resources companies, which has helped to push up the equities market.
And the enlarged appetite for risk has spurred gains in volatile stocks such as Macquarie Group, which has become something of a bellwether for risk.
At the same time investors seem to be hedging their bets. Big gains in the low-risk and higher-yield stocks such as banks, non-discretionary retail and Telstra suggest that there is still a degree of caution being exercised.
This week Woolworths and Coles' parent Wesfarmers will release quarterly sales numbers that should demonstrate that consumers are still spending on non-discretionary items, but the outlook for the discretionary stocks is not so good. To the extent these companies can improve their positions relies on cutting costs and structural change.
These are the companies in which investors are prepared to gamble.
While they may be reweighting out of bonds and into equities Australian households are not prepared to divert from the now well established trend of reducing household debt.
According to a Dun & Bradstreet survey, fewer people are prepared to take on debt in the near term and therefore demand for credit remains weak or flat.
One of the consequences of this is that debit card use is on the incline and debt delinquencies could fall.
None of the above is designed to suggest that the equity market rally is over. It's chicken and egg - but the egg seems to be coming first.