The second half is shaping up to be a challenging one for investors who have to chart a course that straddles both a slow-growing economy and a meteoric stocks rally that will be difficult to sustain.
Precious metals and other parts of the dollar-sensitive commodities trade appear to be the sexy picks among portfolio managers going forward. But fears are growing about what will follow the second-quarter junk rally that came from the most beaten-down sectors.
Market experts see the best-news scenario being a continued market pullback from the springtime rally followed by a rebound that will take the market above its current levels, though few are sure just how that will play out.
Various factors, primary among them unemployment trends and earnings outlooks, are expected to determine the shape of the recovery.
"We've hit a bottom from the economic standpoint, but I don't think it's a 'V' from the standpoint of an economic recovery," said Gary Flam, portfolio manager at Bel Air Investment Advisors in Los Angeles. "The market seemed to price in a 'V' recovery and right now it's digesting the fact that it will be a bumpy recovery and a slow recovery."
The stock market lost more than half its value from the historic highs of October 2007 to the lows of March 9. The market then recovered in a rally that saw those losses cut by about a third, but has since retreated amid conflicting economic signals that show some parts of business picking up but employment lagging.
The uncertainty of the market's direction has some investment advisors holding cash until things get clearer.
"We just had a massive rally. They don't go on forever," said Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. "At the end of the day, what is it that's propping up the economy? It's government spending. That can keep going for a while, but eventually you're just creating a different bubble. Eventually we've got to see economic numbers that are good."
Unemployment remains mired at 9.5 percent and is almost certainly headed higher.
Yet readings such as Monday's Institute of Supply Management barometer of service sector activity show conditions picking up for some companies.
Beaten-down sectors — banks in particular — have fueled much of the rally from the March lows. As such, the Chicago Board Options Exchange's Volatility Index continues to show fear in the markets.
In the short term, Tuttle said he is looking for entry points that would be presented by a pullback in stocks. For the intermediate and longer term, though, his clients' money is in cash until the trends change toward real economic growth and not merely an improvement from the abyss of the recession.
One move that is drawing almost universal support, though, is the commodity play, particularly precious metals like gold and silver.
UBS raised its view on commodity prices with expected gains of 43 percent for copper and silver, and 33 percent for nickel.
As for equity plays off the metals boom, UBS specifically listed Rio Tinto , Vale , Freeport McMoran , Vedanta Resources and Peabody Energy as stocks likely to benefit.
A weak dollar due to heavy borrowing from the U.S. government is one reason the commodity trade should be lively.
But global demand for metals, particularly gold, is adding a stronger fundamental base for the trade and convincing investors that a long-term trend is taking place, said Sean Brodrick, commodities and precious metals analyst for Weiss Research.
"I expect the U.S. dollar in the second half of the year to go lower, and that will send precious metals higher," Brodrick said. "Even though China just backed off from the statement last week that it wants a new international supercurrency, that issue is still on the table. That is an issue that is not going to go away."
The global-growth trade and the demand it would create also is being counted on by those who think the stock market is going higher.
Particularly, growth stories in Brazil, India and China — three-fourths of the so-called BRIC group that also includes Russia — are being looked at to push quality large- and small-cap companies for the second half.
"There was a fear that the emerging market story, the globalization of the free market, was over, and that's a major fallacy," said Jordan Kimmel, market strategist at National Securities in New York. "In Brazil and India and China, they continue to build infrastructure, they continue to build the middle class."
Kimmel sees the market closing the year "at a higher level (so much so) that it surprises everybody." Cash flow should be key for investors in a market where the Standard & Poor's 500 is trading at its highest historic level relative to cash flow, Kimmel said.
"We already had a nice month last month, with a fair amount of money coming back into the markets," he said. "As the individual investors begin to see rising prices they will be unable to stop themselves. Portfolio managers who missed the entire initial move are looking to scale in on pullbacks."
But while the buy-the-dips strategy could remain popular, how much conviction accompanies that buying will be the key.
Investors no doubt will be watching the government to see how much it continues to spend to revitalize the economy, and how much a factor the ensuing inflation will have on equity values.
"We're really concerned about the impact all this stimulus is eventually going to have, whether we're going to see stagflation again," Tuttle said. "There's a lot of stuff we're looking at that scares us."Slideshow: The S&P 500's Leanest Companies