The big story on the front page of the weekend edition of the Financial Times goes into the effect of short covering in fueling the incessant rise in the market. Specific mention is made of the recent otherwise inexplicable run ups in stocks like AIG, Fannie, Freddie, and Citigroup. I certainly can't recall reading or hearing very much in the way of company specific news that would suggest there's any fundamental change for the better in the fortunes of the aforementioned firms. Granted, it seems that AIG is making some additional progress in offloading various assets, but the amounts involved seem to be comparable to drops in a bucket, when compared to the liabilities on the balance sheet.
The article mentions that the average short interest as percentage of S&P 500 stocks, as of mid-August, has fallen to the lowest level in 8 months. Data from Bespoke Investment Group is showing "average short interest in other major equity indices has fallen to the lowest levels since at least October 2007". At the risk of sounding simplistic, the bottom line is that when there're more buyers than sellers, markets move up, and vice versa. With shorts covering their positions, it appears to me that one of the major players on the buy side of the equation is pretty much out of the game, leaving the nebulous "money on the sidelines" to shoulder the heavy lifting. Given valuations at this point in time, I'm not certain how it can be reasonably argued that stocks are "cheap". Being charitable, I'll say they're "fairly valued", at best. My best guess as to the nature of the "money on the sidelines" involves mutual funds involved in various forms of "window dressing", and I'm thinking that, given the duration of the rally, the bulk of that's been done, already.
Source: Financial Times
Full disclosure: No positions held in any securities mentioned.