Keeping some detachment advisable in erratic market. (Mutual Funds).

THE stock market's propensity for sudden changes of character is nothing short of amazing.

One minute you're staring at a bear of seemingly intractable ferocity. The next, before you've had a chance to blink, you're looking at a bull. Lon Chaney Jr. in "The Wolf Man" couldn't do a more dramatic change of face.

The latest scene of this sort was set a little more than two months ago: The stock market, struggling to get up off the mat after an 18-month pummeling, took a staggering new blow when the terrorists struck. The Nasdaq Composite Index, already slashed to one-third of its peak, plunged another 16 percent in a week.

At that moment, though, a changeover began. In less time than it takes to look up the word "lycanthrope," stocks began rallying.

As of mid-November, the Nasdaq boasted a gain of 34 percent from its Sept. 21 bottom -- a big enough rise by traditional units of measure to declare a new bull market in force. The more sedate Standard & Poor's 500 Index and Dow Jones Industrial Average are up 18 percent and 20 percent, respectively, from their lows.

What sense to make of this? If I remember my old movies right, the first rule in dealing with werewolves is never to get too emotionally involved. Chaney's recurring character Larry Talbot always begged his girlfriends, "No matter what sounds you hear from my room tonight, don't unlock the door!"

Staying calm

Immediately after Sept. 11, keeping a safe distance meant resisting the urge to panic. Now, prudence argues, the situation demands a similar measure of detachment even as we savor the rally.

To be optimistic long-term is one thing. To expect stocks to stage some sort of straight-up recovery from here, amid all the questions facing the market, may be asking too much.

The price-earnings ratio of the S&P 500, at 44.4 to 1 according to Bloomberg data, has gone much higher than its mid-30s bull-market peak, having widened dramatically of late as stock prices rose while earnings slumped. It will be a while before earnings begin to catch up.

In the economic news, "there's more pain ahead," says Stuart Schweitzer, global investment strategist at J.P. Morgan Asset Management Inc. "We do see a really impressive profit rebound, but it's a long way away."

Economist Jay Mueller at the fund firm Strong Capital Management Inc., which manages $47 billion, sees "a daunting path for the next few months. Once we get through the drop and then the bounce-back, and we get back to 'normal,' the question is, what does 'normal' look like?"

The economy still has much to sort out from the '90s boom and subsequent bust, says Shelby M.C. Davis, founder of Davis Selected Advisers, which manages $38 billion in mutual funds and other accounts.

Trading range 

Davis says the stock market could keep rising into next year, "but we think it will be only a minor new high, without the normal follow-through of a new bull market leg," he writes in a letter to shareholders. "We expect the market to remain within a trading range as it continues the process of correcting a decade or more of over-achievement."

Farther into the future, all three commentators see a brighter prospect. Davis speaks of a possible new bull market in 2003-2004. Schweitzer says he is completely confident that "the terrorists will not succeed in destroying the globalized world economy. Globalization makes everybody better off."

Says Mueller, in the same vein, "the economic outlook in the long run is bright. Among the many miscalculations made by the terrorists, they underestimated the extent to which Americans are forward-looking, creative, dynamic, determined and optimistic. The antidote to fear is hope."

Therein lies the beauty of long-term investing -- no trying to track every move of a market that appears benign one minute, beastly the next. Whichever face you're looking at, though, it's dangerous to forget the other that lurks just out of view.

RELATED ARTICLE: Be Skeptical of 'Market-Neutral' Funds

Any time stocks hit a sour note, count on somebody to start trumpeting "market-neutral" mutual funds.

These specialty funds mix together roughly equal amounts of buying and short-selling, or borrowing stock and selling it in a bid to profit from price declines. The idea is to balance the long and the short positions so as to neutralize the effect of any general rise or decline in the market.

In order to be worth their variability and other risks, market-neutral funds need to produce results that beat simple, low-stress alternatives such as money funds and short-term bond funds. These funds already give investors a pretty good place to take shelter from stocks' ups and downs.

Another problem: Variability in market-neutral funds often runs to extremes, both from one fund to another and in the same fund from one year to the next. Results from the past 12 months among individual market-neutral funds tracked by Bloomberg ranged from a 28 percent gain to a 44 percent loss.

Before I'd expose my money to this kind of inconsistency, I'd want to see a solid, sustained advantage in returns over money and short-term bond funds.

Even if a market-neutral fund showed that kind of results, I'd have some further questions to ask. Just because the stock market doesn't always go my way, do I really want to insulate myself from all its ups and downs?

No way, I'd say -- not if I'm investing for growth. As long as any kind of long-term economic growth continues, one of the prime reasons to own stocks is their natural tendency to rise along with businesses' earning power.

To put it another way, managers of market-neutral funds play stocks the hard way, electing not to swim with the current but going across it instead. This approach also tends to incur higher expenses and taxes than long-term buy and hold.

Chet Currier is a columnist with Bloomberg News.