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Investors are thrilled yet anxious about stock market rally

People still smarting from last year's devastation in their mutual funds and 401(k) accounts worry that the almost relentless advance could give way to another free fall.

September 17, 2009|Walter Hamilton And Tom Petruno and Tiffany Hsu

NEW YORK AND LOS ANGELES — Dania Leon's portfolio has surged 55% during the stock market's booming rally over the six last months -- and she couldn't be more nervous.

After suffering deep losses last year, the 41-year-old Pasadena resident is grateful to recoup some of her money. But she fears that stock prices have shot up far more than is warranted given the country's still-weak economy and nearly double-digit unemployment rate.

"I'm scared, I'm scared, I'm scared," Leon said. "Why are we up, especially with unemployment as high as it is? I don't feel great because I worry that we could have a 500- or 600-point drop in a day and I won't be quick enough to pull out of it in time."

Propelled by growing faith that the global economy has stopped contracting, this year's stock surge comes as an enormous relief after the brutal sell-off during the financial crisis -- and it shows no sign of letting up.

Yet it's also one of the least joyous bull runs in memory, as individual investors still smarting from last year's devastation in their mutual funds and 401(k) accounts fear that the advance could give way to another free fall.

"I see a lot of nervousness," said Wade Cooperman, chief executive of online brokerage TradeMonster. "It's not that long ago that some people rode [the market] right down to the bottom."

After jumping 108.30 points, or 1.1%, on Wednesday to 9,791.71, the Dow Jones industrial average is up 5.5% in just the last two weeks.

The blue-chip index has risen a stunning 50% since hitting a 12-year low in early March and is just about 200 points shy of 10,000, a mark that six months ago few expected to see any time soon.

Market optimists say stocks are responding as they always do to increasing evidence that the economy is coming out of recession, which should fuel a revival in corporate earnings. On Tuesday, Federal Reserve Chairman Ben S. Bernanke reinforced that sentiment by declaring that the recession was "very likely over."

What has stunned many Wall Street veterans, however, is how relentless the rally has been since March, particularly given that most economists believe that any recovery will be weak at best and therefore tenuous.

But investors have been undeterred. Key stock indexes have yet to be hit by a meaningful "correction" -- a normal 10% to 15% pullback within a rising market.

Such retreats are considered an essential part of longer-term bull markets because they give the economy time to catch up with investors' expectations. Often triggered by investors taking some of their profits off the table, corrections also allow people who missed the initial surge to jump in.

But potential buyers looking for such an opening in this rally have been stymied.

"People say, 'I'm waiting, waiting, waiting for a pullback, but it doesn't happen,' " said Nick Sargen, chief investment officer at Cincinnati-based Fort Washington Investment Advisors, which manages about $30 billion in assets for its clients.

"This market continues to baffle everybody," said Ryan Larson, a trader at Voyageur Asset Management in Chicago.

The lack of a significant interruption in the march upward worries Keith Murphy.

During the market's plunge last year and early this year, the Foothill Ranch mortgage advisor resisted the urge to unload his stock holdings, which are currently worth about $500,000. But now that things are looking up, he's wondering if it's time to sell.

"Every single day I get ready to click the sell button and pull my chips off the table," Murphy said. "It's confusing, and I'm afraid of what to do and afraid we could be in a bubble. The market's looking floppy, and the reasons for growth don't make sense."

Such fears are understandable, said Terry Odean, an expert in investor behavior at UC Berkeley.

"You got whacked on the upside of your head last year, and you're looking over your shoulder to see if it's coming again," Odean said.

The rally also is stirring high anxiety among people who sold stocks during the downturn and have been sitting out, too fearful to take a chance in the market.

"They've been traumatized twice," said Michal Strahilevitz, a business professor at Golden Gate University in San Francisco who studies the psychology of individual investors. "First they lost a lot and got out. And now they've watched it climb up. It's a lot of regret, and for people who are investing for their family, it's a lot of guilt."

There may be some solace in knowing that many professional forecasters have gotten it wrong too. Coming into September, warnings were everywhere that a sell-off was imminent. Classic measures of market sentiment were strongly bullish, which often signals at least a short-term top in share prices. History also was against the market: Over the last 50 years, September has been the weakest month of the year for stocks.

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