NEW YORK (CNN/Money) - It doesn't matter whether they're bulls or bears, when it comes to times of uncertainty, all mutual fund managers start huddling together like sheep.

The past month has been no exception. Unsure of how the war in Iraq would go or how the market would react, the guys and gals running America's stock funds knew that no matter which way they placed their bets, they ran the risk of getting clocked.

If they latched onto, say, tech, which tends to have bigger moves than other sectors, and the market fell, they would have fallen behind the benchmark S&P 500. Just as they would fall behind if they played defensively by raising cash and buying utility stocks and the market rallied.

For mutual fund managers, falling far behind the index that you're judged against is cardinal sin, one that can lose you your year-end bonus or even your job. It's a punishment that far outweighs the rewards you get for beating the index and your peers.

"Many fund managers, if they're not in for a two-day rally, they risk falling behind for the whole year," said Merrill Lynch equity strategist Kari Pinkernell. "How do you minimize risk? By hugging the index as best you can."

At the least, then, they make sure that their portfolios' sector weights match up with the sector weights in the S&P, and that they've got the right proportion of all the heavily weighted stocks in the index, like General Electric.

"We're not proud of it," said Brett Gallagher, head of U.S. equities at Julius Baer Investment Management, who, despite a fundamentally bearish take on the market, shifted a heavy cash position back into stocks last month. As with many other fund managers, Gallagher didn't want to see a repeat of last October, when a big rally in stocks took away much of his fund's outperformance for the year.

Most fund managers aren't as forthright as Gallagher, but signs of index hugging abound. Credit Suisse First Boston's quantitative analysis group has shown that the correlation among stocks in the S&P 500 -- the degree to which they rise and fall with each other -- has reached its highest degree since 1987.

Rather than buying shares that make it up individually, many investors have been buying the S&P 500 outright through the S&P Depository Receipts (SPY: Research, Estimates) (SPDRs), known as "spiders." Volume in the "spiders" has tended to move higher during times of uncertainty, like the big selloffs in the summer and fall last year and during the current period.

But such myopia, as CSFB equity strategist Paddy Jilek has termed it, has doubtlessly created huge dislocations in where individual stocks and sectors are trading and where they should be trading. All stocks are not created equal, after all, and they don't deserve to all rise and fall together. There are babies and then there is bath water. With the markets' focus shifting away from war, the time to correct those dislocations may have come.

Where those dislocations are, depends largely on where earnings and the economy are headed. Pinkernell thinks that investors are overly optimistic on both counts, so she and her colleagues are recommending investors go overweight in defensive sectors -- like consumer staples and utilities -- which don't get affected by the economy's ups and downs like consumer cyclicals and tech.

Strategists who believe the country is on the cusp of an economic revival think investors should place their bets on the opposite side of the table, putting a cyclical flavor on their portfolios to take full advantage of the coming rise in profits.

As for Gallagher, he's trying to get his nerve up to move away from herd, thinking that maybe a shift into the energy sector might make sense, given his belief that oil prices won't fall as much most market players think.

"We don't get paid for matching the benchmark," he said. "I think we're getting close to where we have to go back to playing the game. But we're not ready to pull the trigger yet."