Rally Keeps Stocks a Step Ahead of Uncertainty

Big averages regain Sept. 10 levels, but it's only a matter of time till someone takes some profits.
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Rationalize all you like, make whatever excuses you can. But seeing the stock market regain its Sept. 10 closing levels is a hard thing to wrap your head around.

There is, after all, nothing you can say to make the U.S. outlook seem better now than it was the day before the terrorist attacks. We've gone from a nation at peace to a nation at war. From a country that was skirting recession to one that is in one. And still nobody can accurately gauge how deep the shock to confidence has been, know how long the downturn will last or say what bogeys lie in our future.

Yet for all that, investors have apparently decided that U.S. companies are broadly worth more today than they were the Monday before everything changed.

The benchmark

S&P 500

rose 1.5% to 1097.43, 4.89 points above its Sept. 10 close. The

Nasdaq Composite

closed up 4.6% to 1701.47, 6.9 points above its preattack level. Meanwhile, the Wilshire 5000 -- the broadest measure of total U.S. stock market capitalization -- rose 1.7% to 10,109.04, 4.66 over its Sept. 10 finish.

Traders emphasize that we are not in the realm of fundamentals here, but psychology. Using a valuation framework to understand the market's rebound simply will not work.

Although the outlook for the economy is bleaker than it once was, notes Doug Myers, IJL Wachovia vice president of equity trading, investors appear to have been somewhat appeased by having a better idea about what the outlook is. There was a lot of uncertainty about whether the U.S. was going into recession before Sept. 11, for instance. Now there can be no doubt. The U.S. policy response to the crisis on the monetary, fiscal and geopolitical fronts has been comforting. A sense of perseverance and a commitment to bringing the country back to health prevail.

"It's the unknown that causes investors to hesitate," says Myers. "Once a couple of the unknowns get filled in, things can go higher."

There is also a sense that stocks have weathered the worst of it. Despite persistent calls for the market to slide back down and retest its recent lows, it's hard to come up with what specific event might drive that selling. What could be worse than Sept. 11? Sure, you can

imagine

things, but investing based on doomsday scenarios doesn't seem wise.

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Stocks recover as fog lifts a bit

Traders also say that they have been impressed by the quality of the buying. Early though it may be, the dynamic of the market move -- broad-based, with financials at the fore -- is exactly what you expect to see when investors start looking past a downturn to the next period of economic growth.

"There's some solid buying out there and it covers a broad front," says Ned Collins, executive vice president of U.S. stocks for Daiwa Securities America. "These are not just flippant little up moves. There are some people that are becoming believers."

Still, while a crash back down to the selloff lows may not be in the cards, traders expect some sort of pullback soon. After all, anyone who bought in the immediate wake of Sept. 11 has made a pretty penny, and taking some profits off the table would seem to make sense. A little caution should come back into the market soon.

"People see a silver lining on a day like today," concludes Myers. "But there's still a great big, dark green cloud."