Buoyed by a solid employment report for the month of April, both the S&P 500 (SNPINDEX:^GSPC) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) achieved new record highs on a 1% daily gain. It was also a day for symbolic and psychological levels, as the S&P 500 closed above 1,600 for the first time, while the Dow broke 15,000 on an intraday basis for the first time. Small-cap stocks also participated, with the Russell 2000 Index also making a new all-time high on a 1.6% increase.

With multiple new highs set and big levels broken, it's no wonder the VIX Index (VOLATILITYINDICES:^VIX), Wall Street's fear gauge, fell 5%, to close below 13. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Investors aren't buying it
At the end of last month, I christened the current bull market a "risk-refusal rally," in which "investors -- particularly individuals -- have returned to the stock market only grudgingly and with extreme caution." One need only look at the sentiment data to see this.

The American Association of Individual Investors publishes the data for its weekly sentiment poll going back to July 24, 1987. Its most recent poll yesterday showed that just 31% of respondents were "bullish" -- well below the 39% average going back to the survey's inception. At 33%, the eight-week moving average is also below the historical average. Consider that on Sept. 20, 2008 -- five days after Lehman Brothers filed for bankruptcy -- the bullish reading was also 39%.

The current gloomy sentiment numbers look completely inconsistent with the strength of the stock market performance we've witnessed: Excluding dividends, the S&P 500 is up better than 13% year to date and 139% from its March 2009 low.

In an interview at the Milken Institute Global Conference this week, Mohamed El-Erian, CEO of fund manager PIMCO, gave an explanation for this phenomenon:

People say this is the most unloved rally -- and it is. Why? Because people, deep inside, know there's an element of artificialness to it. The excitement at breaking one record after another comes with the anxiety of "this is not really genuine and at some point we need to hand off [to genuine, robust growth]."

In principle, if investors are still "holding back," that suggests this rally still has room to run. However, El-Erian's view reminds us that sentiment (prices) is/ are one thing and fundamentals (value) another. As stocks prices continue to float upwards, stock pickers need to be increasingly wary that they don't float past the valuations that underlying fundamentals can support.