The last burst of market optimism?

When do investors love stocks the most?

The simple answer is: After a long-term bullish trend has matured.

The S&P 500 recently stood near 5-year highs. And speaking of "recent," consider this investor behavior.

Equity mutual funds recorded the second-highest inflows on record in the first week of the year. ... About $22 billion flowed into equity funds around the world.

Bloomberg, Jan. 11

A red flag? Not to a well-known market newsletter writer quoted in this CNBC (1/11) headline:

Money Pours Back in Stocks: 'Have to Take This as Bullish'

Well, investors were also bullish on Oct. 9, 2007, just before the Dow's all-time closing high. Just days earlier (the third week of September 2007), equity fund inflows hit an all-time record of $23 billion. Look at the chart.

So: Almost as much money just went into stock funds as what occurred just before the Dow's all-time closing high.

Far from being bullish, the September 2007 Elliott Wave Financial Forecast provided subscribers with this warning:

Stocks remain at the forefront of a long decline.

As we know, that warning came just in time. October 2007 began the worst bear market since 1929-32.

And now, stock fund inflows provide evidence of similarly high levels of market optimism. The facts speak for themselves: the public is jumping into stocks now, after being reluctant to do so for most of the uptrend since March 2009.

Extreme opinions, shared widely, constitute the single most reliable indicator of an impending change of direction for a market. If virtually everyone is thinking one way, they have already acted, so the market has extremely limited potential to continue on its old path and huge potential to go the other way.

The Elliott Wave Theorist, July 2006

Almost no one expects the degree of change that Elliott Wave International anticipates. It's time that you start thinking independently of the crowd and prepare for a psychological change that will be reflected in the price patterns of U.S. markets.

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This article was syndicated by Elliott Wave International and was originally published under the headline A Coy Public Suddenly Gets Cozy with Stocks. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.