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Has stock market already recovered?

The stock market's recovery still has a way to go _ or does it? It may come down to how you gauge Wall Street's current health.

Typically, investors take their cues from the major market averages _ namely the Dow Jones industrials, the Standard & Poor's 500 and the Nasdaq composite index. Sure, they've made solid gains over the last year, but still are far from recouping all of the big losses suffered during the crippling three-year bear market.

But those indexes don't necessarily reflect what's happening in the broader market. In fact, it turns out that many individual stocks are actually trading above the peak levels they reached during the market boom in 2000.

"This shows that there are still pockets of opportunity on the upside, but maybe not everywhere," said Sam Stovall, chief investment strategist at Standard & Poor's.

First let's look at where the big indexes are right now. The Dow is trading above the important 10,000 benchmark, but still is about 10 percent below its record high. The S&P, despite its 26 percent comeback in 2003, still is about 25 percent down from the high it reached in March 2000. And the Nasdaq is still less than half of what it was at its peak.

By those measures, it looks like the market is still undervalued and there is still plenty of room left for it to climb from the five-year lows hit back in October 2002.

Not so fast.

Research by Standard & Poor's paints a different picture. It found that four of the 10 sectors in its S&P 500 index _ consumer discretionary, financial, materials and industrial stocks _ have already more than recovered and are now well ahead of the levels they hit in 2000. Three sectors _ health care, consumer staples and energy _ are within 11 percent of their 2000 highs.

That leaves the telecommunications, technology and utility sectors still lagging way behind, which isn't so surprising. Telecom and tech shares were the most overvalued during the last bull market and may never again return to those heights, while utility shares have been battered by scandal throughout the industry led by the collapse of Enron.

Part of the reason for the gap between the indexes and individual stocks has to do with how the indexes are calculated. They aren't straight averages, but rather they are weighted by certain factors. The S&P, for instance, is weighted by market capitalization, which allows bigger stocks such as General Electric and Microsoft to greatly influence its moves.

But even leveling the playing field shows how the market is further into the recovery than the indexes represent.

Mutual fund research firm Morningstar looked at a universe of 5,999 individual stocks and then compared those returns for all of last year with the average return of the stocks in the S&P 500, stripping out any market-cap weighting.

It turns out that the individual stocks had an average return of 90 percent last year, compared with the 42 percent average return for the stocks in the S&P 500. And the median return, which wipes out any high-flyers or big losers that can skew the average, came in at 38 percent for the 5,999 stocks vs. 32 percent for the S&P 500.

Those superior returns found in individual stocks makes the study's author, Morningstar equity strategist Mark A. Sellers, question how much bounce the market has left.

"Across the board, stocks are fairly valued at best, and there are plenty that are overvalued already. Nothing is that cheap," Sellers said. "That doesn't mean that the market will go down in 2004, but it means it won't go up" anywhere near as much as was seen in the last year.

Of course, this is Wall Street, so there is no telling what its next move might be.