Stock market rallies, but money managers advise caution

The recent eye-popping gains in the stock market offered a rare bit of sunshine in the middle of a worldwide economic tsunami. But institutional money managers are cautioning investors into reading too much into the rally.

"We are still in a long-term bear market . . . not the beginning of a long-term stock market rally," said Peter Demirali, vice president and portfolio manager with Cumberland Advisors of Vineland, N.J., which manages $1 billion in assets, in an interview.

The unprecedented levels of volatility have surprised even seasoned market pros. The Dow Jones Industrial Average and S&P 500 are off about 40 percent over the past year while the Nasdaq Composite Index plunged 35 percent. Short sales havereached record levels even though the indexes have posted gains over the past month as worries about the Obama administration's bank rescue plan appear to have eased.

Some investors -- particularly those at or near retirement age -- are pulling out of the stock market entirely even though financial advisers recommend that all investors have some exposure to equities. Demarili, who is encouraging investors to buy municipal bonds, said he understands why the market has spooked investors.

"We have talked a lot of clients in off the ledge," he said. "You don't want them to have a heart attack. It's an emotional process."

Though pundits on CNBC often talk about calling a "market bottom," experts caution that it is difficult to do under normal conditions and will be extraordinarily hard to figure out in the current market.

"Ultimately, you won't know if this is the bottom for months or years to come," said Don Bennyhoff, a senior investment analyst with the Vanguard Group, an interview. "You just don't ultimately know."

Investors should review their portfolio to make sure that their investment strategy is as well-founded now as it was before the market meltdown, he said.

Stan Stovall, chief market strategist at Standard & Poors, is advising investors to remain cautious, arguing that the only way to know when the bear market rally is over is when prices stop falling. Investors with a short-term horizon may be able to trade the rally though many experts are recommending less risky alternatives to stocks such as bonds.

Even when the market rebounds, it will not be a straight shot up. The lows may be retested before stocks start trending upward. Many economists expect the recession to end in the third or fourth quarter. In the meantime, investors will have to be patient and flexible.

"I would not be surprised if the market traces the design on Charlie Brown's shirt," Stovall said. "When life gives you lemons, you make whiskey sours."

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