In recent weeks, hedge funds and individuals—both unenthusiastic participants in the 2012 equity rally—have shifted money out of fixed-income investments and into stocks, pushing up shares sharply.

Small-cap stocks, in which individual investors often are active, again outperformed last week. The first fourth-quarter earnings reports released—though just a handful—were good enough to boost stocks, or at least not sidetrack the rally.

Last week, the Dow Jones Industrial Average rose 53 points, or 0.4% to 13,488.43, while the S&P 500 gained 6, or 0.4%, to 1472.05, and hit a five-year closing high of 1472.12 Thursday. It’s just 6% below its all-time high of 1565, set in 2007. The Nasdaq Composite added 24 points, or 0.8%, to end at 3125.63. And the Russell 2000 index finished at 880.77, up 0.2%, and near an all-time high.

Among the sectors that rallied, notes Stephen Massocca, a portfolio manager at Wedbush Equity Management, were the high-yielding master limited partnerships (MLPs) and real-estate investment trusts (REITs) that are preferred by individual investors. A bit more than two dozen S&P 500 companies reported fourth-quarter results, and a lack of bad numbers helped support the market, he says. In addition, the recent increase in money flows into mutual funds in instructive, he says. According to EPFR Global, which tracks fund flows, in early January actively managed U.S. equity funds posted their biggest inflow in over a decade.

At the same time, “we’ve been seeing hedge-fund flows coming back in,” adds David Abuaf, chief investment officer of Hefty Wealth Partners. His anecdotal report is supported by data from Carpenter Analytix, which tracks hedge funds. Founder Robin Carpenter writes that the funds, which built equity positions through 2012, now have historically high levels of stocks. They’ve cut their fixed-income positions.

The broader narrative, adds Peter Kenny, managing director of institutional sales at Knight Capital Americas, is that investors are getting more comfortable with the economic picture and what that means for equities.

“It’s a grand party,” but there’s some risk, and the biggest hurdle remains ahead in late February when the government must address the debt ceiling and potential spending sequestrations. Carpenter adds that historically high hedge-fund equity levels often precede downdrafts. Shorter-term, stocks face the technical challenge of overcoming the old intraday high of 1474, reached in September. Should they fail to burst through, a pause in the rally wouldn’t be out of the question. A push through would bring in more investors (Source:  Barrons Online).