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"Here bring your wounded hearts, here tell your anguish;
Earth has no sorrow that Heaven cannot heal." --Thomas Moore

Back in mid-December, when we were moving toward the end of a robust countertrend rally, I offered a holiday wish list. I conjectured what it might take to lure what I called the "

wounded investor" back into the market.

Now, three months later and six months after Sept. 11, how many of my wishes came true? Have the wounds healed sufficiently for retail investors to come back into the market anytime soon?

My first point was that the spike-up needed to continue. It didn't. By the end of January, murmurings that we could be in for an unprecedented third-straight down year were already becoming prematurely audible.

My second point was that leading economic indicators needed to show a rebound. Indeed, recently, there have been healthy signs that this is taking place. Corporate profits now appear to be slowly improving; fewer companies are preannouncing shortfalls, and more companies are raising their earnings targets for the next quarter. If the improved earnings trend is to continue, it's pretty obvious we'll need to see a continued strong economic recovery. And that means no double-dipping of the recessionary ice cream cone.

My third point was that the wounded investor needed to feel increased safety from event risk. I said this would be measured by "no terrorist attacks in this country for at least the next two months; no further reports of anthrax or any other biochemical threat for the same period; no mysterious plane crashes or major catastrophes anywhere in this country; and no further suspicions or reports of airport security problems."

With the exception of the foiled attempt by the deranged shoe-bomber, a few minor scares and the ongoing inconvenience at airports, this wish has been realized.

'Ob-La-Di, Ob-La-Da, Life Goes On'

For the time being, we're no longer living under the fear and acute anxiety of "high alert," and we're edging back toward more normal life. People care about sports and cultural events again. They're back to worrying about the same old things they used to worry about but perhaps with a bit more sensitivity toward each other.

The preoccupation with terrorism and personal safety has receded -- at least out here in sunny California. However, a psychologist friend in New York City tells me that the psychic trauma

continues to reverberate closer to Ground Zero, and that he fears we have seen only a taste of what the terrorists within our borders have in store.

Don't misunderstand, though: I said

edging

back. Personally, I haven't been on an airplane since The Day. But this is more because of the airport hassle factor than fear of an incident occurring. Remember, one of the aims of effective terrorism is to permanently disrupt normal life. To some degree, it's working.

The last item on the list was progress in the fight against terrorism and a lessening of tensions in the Middle East. This had to do with events that would remind the investor of the vulnerability of the market to major geopolitical events. Regarding the war on terrorism, this is a tough one to call. On the one hand, we've had the relentless bombing of Afghanistan and the current behind-the-scenes staging of possible military action against Iraq and other terrorist foes, which may come soon.

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On the other hand, we were deprived of the psychological closure that would have come with seeing the dead body of Osama bin Laden. Although bin Laden can't be considered more than a "dead man walking," he is, by most reports, still walking. This lack of closure after the intense effort to locate and destroy him reminded us of Saddam Hussein, whom we also were unable to finish off, and who now squirms out from under his biochemical rock to haunt us once again.

Turning to the Middle East, the crisis has unfortunately only worsened. The Arab suicide blast brigade is out in full force. Tensions have escalated, as each side continues to retaliate against the abominable acts of the other. Conclusion: Event risk has lessened, but not enough to buttress the confidence of the wounded investor.

What's more, the

Enron

fiasco, and the lack of trust in corporate directors, accountants and lawyers that it represents, reopened the wound, increasing market risk. Although "cooking the books" was nothing new, this time the books got seared and sheared. This painfully reinforced the belief of the wounded investor in the corruptness of big business in general, and the unpredictability and manipulation of the stock market in particular.

Prognosis: Guarded

The wounded investor is still in recovery. The patient is gaining strength and his mental outlook is steadily improving. But I must conclude that he's not yet ready to risk further hemorrhaging of capital by coming back into the equity market in any significant way. The risk is still perceived as too high for the possible reward.

The patient requires further treatment to deal with the issues of dread of loss and pervasive mistrust. For now, he'd prefer to invest his capital in his home or to keep it in cash, even at a puny 2% return. While there is some indication that we are moving from a downtrend to a neutral trend (e.g., the

S&P 500

making a higher low), an upward trend has yet to be confirmed (by establishing a higher high).

Until a defined upward trend has been established, the retail investor will continue to lick his wounds and struggle to banish the thought in the back of his mind that it's only a matter of time before the other shoe-bomb drops.

Results of The Shrink Rap Trivia Contest: Over 250 responses; the most popular answers were Mick Jagger, James Taylor, and the correct answer,¿Warren Beatty. The winner of the book was Dan Rayfield¿from Texas. The next¿contest, coming soon, will be one¿where the answer cannot be found on the Net. It's going to be a tough one. Stay tuned, and keep those questions coming!

¿

Steven J. Hendlin, Ph.D. is a clinical psychologist in Irvine, Calif. He has been in private practice for the last 25 years, investing for the last 20 years, and actively trading online as a swing trader and long-term investor since 1996. He is the author of

The Disciplined Online Investor

recently translated into Spanish. He is pleased to receive your comments and questions for publication in his public forum columns at

steven.hendlin@thestreet.com, but please remember that he is unable to provide personal counseling or psychotherapy through the mail.

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