All that can be heard on Wall Street right now is the sound of euphoria. Waves and waves of it as stocks climb to almost 50% off their lows. This is the kind of noise we’re talking about. 

It’s the CNBC talking heads high-fiving each other over a V-shaped recovery. It’s Newsweek touting the “end of the recession” (and selling more magazines on the back of the extra publicity). It’s the raising of global equities forecasts by big shot analysts at the likes of Goldman Sachs, Credit Suisse and Barclays.

The noise is so loud right now that it’s extraordinarily difficult to hear the signals. And it’s harder and harder for individual investors to stay on the sidelines and away from the herd. But the signals are there. You just have to know where to find them.

As we’ve said before on many occasions here at Notes, there is clearly money to be made in equities right now. But that money better be nimble. Remember, markets aren’t rational. So just because it isn’t logical for stocks to be rallying right now doesn’t mean they aren’t rallying. And just because stocks should take a tumble soon, doesn’t mean they will.

Here at Notes all we care about is that you go into each investment armed with both sides of the economic story. After that, what you do with your money is entirely up to you. Some of you will decide to ride the euphoria while it lasts. Others will sit it out and wait for value instead. Whatever you decide to do, here are some of the signals we’re picking up from the market right now:

1. This rally is largely speculative and is being driven largely by “junk stocks” – volatile stocks with low analysts ratings that took the worst of the beating in the recent crash. According to underground investor Jeremy Grantham, the most volatile stocks have outperformed the least volatile stocks by 48% since March. And stocks under $5 have outperformed stocks over $50 by 90%. This is a far higher percentage than at the major market bottoms of 1974, 1982 and 2002.

2. Much of the rally is being driven by shorts getting squeezed. According to research firm Bespoke Investment Group, since July 10 the 50 most shorted stocks have gained approximately twice as much as the 50 least shorted stocks. This implies a good deal of the market run-up has been due to short sellers covering their positions.

3. This is a low-volume affair. Data from Bespoke Investment Group show that 84% as many shares were traded daily on the New York Stock Exchange between May 1 and July 20, compared with the average from January 1 to April 30 – the steepest slowdown since 1989.

4. Insiders are short this market. According to Wickers Weekly Insider Report, company directors are selling shares at the fastest rate since October 2007.

5. There is a serious disconnect between what’s happening in the markets and what’s going on in the wider economy. This has been the subject of countless Notes issues. But it’s clear that most investors are treating the current downturn as your run-of-the-mill post-war recession, not the massive credit dislocation and deleveraging cycle that we believe it is. Market bulls have clearly paid no attention to Bill Gross’s forecast (covered extensively in Notes ) that we are entering a “new normal” of sluggish growth, higher savings rates and lower consumer spending.