Uh oh. The individual investor is back

NEW YORK (CNNMoney.com) -- Yep, it's official. Even your grandma is getting bullish about the stock market. And that's as good a reason as any to be prepared for a pullback.

Because, as any good contrarian will tell you, the time to get out is when everyone else is in.

"When you see that commercial with the guy showing his boss how to buy stocks on eTrade, that's a cause for concern," said Tom Schrader, managing director of U.S. equity trading at Legg Mason.

Investors have been pouring money into stock mutual funds in four of the past six weeks, according to AMG. And a recent survey from the nonprofit American Association of Individual Investors showed 42 percent of participants feeling bullish, up from 29 percent two weeks ago.

And why not, when so many advisers are so bullish? The recent Investors Intelligence sentiment survey shows the level of bullishness for investment advisers is just below 55 percent - the breakeven point for many contrarians.

Meanwhile, the Merrill Lynch May global fund managers survey released last week showed portfolio managers are feeling more confident about economic and corporate profit growth in both the United States and abroad.

Feeling good isn't bad, but if it gets to the point that everyone is feeling good and is fully invested in stocks, then where does the new money come from to push stocks even higher?

Since selling off in late February, stocks have been on the rise, thanks to stronger than expected earnings and lots of corporate deals, particularly private equity buyouts.

Gains have also been supported by a sense that the economy is slowing at a moderate pace, that inflation is starting to wane and that the Federal Reserve may cut interest rates by the end of the year.

Hedge funds and other big investors have driven a large portion of the rally's recent run, but the so-called individual investor has been there, too. And with the major gauges at or near record highs now, more than ever before there's a sense of 'I'd better get in before I miss the boat.'

The Dow Jones industrial average (Charts) has risen for seven weeks straight and is near an all-time high. The S&P 500 (Charts) is just below an all-time high, and the Nasdaq composite (Charts) is at a six-year high. The Russell 2000 (Charts) small-cap index is at an all-time high.

Now, however, stocks are facing the notoriously sluggish summer months.

And there are other troubling signs, too, said Katie Townshend, chief market technician at MKM Partners LLP.

Townshend cited a number of technical market measures that show the S&P 500 is vulnerable to a retreat, including the recent run-up in the VIX (Charts), a volatility index traders follow. The VIX and the market tend to move in opposite directions, and the VIX is showing some strong upward momentum right now.

Townshend said she thinks the broad S&P 500 index could be vulnerable to about a 4 or 5 percent pullback over the next few weeks. However, she said it doesn't look like it would be as fast and furious as the big sell-off in late February, when the Dow plunged 416 points in a single day.

There is some good news for contrarians. Townshend said that hedge funds and other market pros she talks to, though bullish on the long-term trend, are also looking for a similar 4 or 5 percent dip in the short term.

If enough people are worried about it, it can probably be avoided, at least for a little longer.