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A leading broker tells of a conversation he'd had last week with a veteran client, following an altercation they'd had in late 2002. Back then, the client was disgusted by the heavy losses he'd incurred. "I told him it was over and done with, to forget about 2002," he relates. "Then he came back last week, and I begged him to forget about 2003 too."

Stock indices shot up 50 percent and more in 2003, and the danger is that the clientele could reach entirely erroneous conclusions. The rally on the market and the signs that the general public is eyeing shares again could trigger an over-reaction. The rebound could overshoot, share prices could climb too high, only to collapse anew.

The warning lights are flashing everywhere you look. Share prices are close to all-time record high levels and the general public hasn't even come back in yet. We have to ask how high the market could climb if the man in the street stampedes the floor. There is nothing inherently wrong with breaking records, but to be sustainable, high share prices must be supported by obvious economic growth. And it cannot be said, at this stage, that such support is there.

Risk of a downturn

Another warning light is the strong shekel. It may allow stocks to clamber on its back, but it is an inherently weak support. Low U.S. interest rates could start rising again, and the temptation of investing in foreign currency (capital gains deriving from exchange rate differentials are not taxable) could weaken the shekel and destabilize the capital markets.

Another sign is the surplus demand hitting the market. New and veteran pension funds are starting to invest, just as the treasury is sharply cutting back its domestic fund-raising efforts. That combination could send bond prices up and yields down, which would impact stocks too.

"I have no doubt that 2004 will be the year of the downturn," said one institutional investor. "It's a classical situation. Just as the pension funds dip their toes into the market for the first time, the market is in a bubble. The hangover will come in 2005."

The market's short memory

Yet another warning sign is the surge of offerings. Buyers are behaving indiscriminately. Companies with a poor record of honoring investors' rights, and whose financial future is murky, are managing to tap the markets for cash. Yet again the market proves that its memory is short.

So is the public's, apparently. That's the very thing the banks are relying on when they launch new mutuals and market them aggressively to the general public. The capital market consensus is that prices aren't sky-high yet, and there's room for the general public to invest. But the danger is that prices are climbing too fast, speeding beyond the economic developments that would support such levels. Such fine distinction between "not expensive" and "too expensive" requires a great deal of caution, and mainly, moderation, when investing today.