(FORTUNE Magazine) – The spoils of war in Iraq have not been confined to the politically well-connected companies that landed plum contracts for the country's reconstruction. Or to the brazen looters of Baghdad's National Museum of Antiquities. In fact, the average investor has been on the receiving end of quite a victory dividend in recent weeks.

Since hitting prewar lows in mid-March, the Dow, S&P 500, and Nasdaq have all surged more than 12%, as market bulls bet that the economy and corporate profits would recover. Contributing to the strong gains have been better-than-expected first-quarter earnings. At press time, S&P 500 companies were beating analysts' earnings estimates by 5.6%.

The euphoria has trickled down to Main Street. Investors poured a net $5.7 billion into stock mutual funds for the week ended April 16, according to AMG Data Services, the largest net inflow in a year. And the rally has been led by the market's riskiest stocks--namely, technology issues. Yahoo and EMC, for instance, are both up more than 50% year-to-date while sporting triple-digit price/earnings ratios.

And therein lies the problem. Whether from patriotic ardor or just plain relief, far too many investors, say many stock watchers, are getting ahead of themselves. While we believe the economy and profits will mount a gradual recovery, the market remains risky on a number of levels.

To get a picture of just how risky, we talked to market strategists, consulted technical analysts, and took a long, hard look at the numbers. We even stress-tested some popular stocks with worst-case scenarios. For now, we're not advocating that you stick all your money under the mattress. The stock market is likely to head higher over the long term. But even committed investors have to do continued risk assessments of their portfolios. And our current assessment? Right now may not be the best time to back up the truck and start loading. "I think too many people believe the worst is over," says Mark Arbeter, chief technical analyst at Standard & Poor's, echoing the sentiment of many of his peers. "In my work, there's very little evidence that it is."

Let's start with the first-quarter earnings. True, they're coming in better than anticipated. But the strong showing is in large part because analysts ratcheted down their forecasts too far, says Chuck Hill, First Call's director of research. It's routine for analysts to bring down their estimates as the quarter approaches. But with war on the horizon in the first quarter, analysts actually became--if you can believe it--pessimistic. That's not something investors can count on in the future.

Another problem is that stocks still aren't that cheap. Many pundits argue that the S&P 500, trading at about 18 times trailing earnings, is back to being reasonably priced. But market bears point out that this figure is calculated with operating earnings, which emerged as a common measure for P/E ratios only about 20 years ago. For a longer-term gauge they cite "as reported" earnings--those defined by Generally Accepted Accounting Principles (GAAP). The data for "as reported" earnings go back to the early 1900s, making them more useful for historical comparison, many argue. Currently stocks are trading at 30 times trailing "as reported" earnings, while bear markets typically bottom at a P/E ratio of 11. "We're still at levels that have never characterized past bear-market bottoms," says Steve Hochberg, chief market analyst at Elliott Wave International, a research firm in Gainesville, Ga. "In some cases, we're still above past bull-market tops."

Yes, the strategists at white-shoe Wall Street firms are calling for a recovery. The consensus view is that the market will rise about 7% this year and next. For an alternative (and perhaps less compromised) assessment of today's market, investors might consider the views of Wall Street's top technical analysts. Known as "chartists," these market watchers dissect the dynamics of the market by scouring a variety of indicators. And according to their readings, it's time to get downright bearish, not bullish.

One of the chartists' favorite measures for gauging the market's strength is momentum. At the beginning of big bull markets there's typically a very strong initial advance. During a 50-day period of trading, for example, the S&P 500 usually surges at least 20%. The highest 50-day rate of change we've seen during this bear market is 17%, in December 2001. As of late April this year, the market was up just 4% over the past 50 days. "We haven't gotten even near some of the momentum figures we've seen coming out of previous bear markets," says S&P's Arbeter.

After momentum, many chartists look at trading volume. If the 50-day moving average on the NYSE and Nasdaq surpasses two billion shares, they say, it suggests an end to the bear market. A sustained level of heavy buying signals that investors are accepting the rise in stock prices and enthusiastically buying into the rally. Currently the 50-day moving average on both exchanges is around 1.4 billion shares, indicating the rise isn't as strong as stock-fund inflows make it seem.

Possibly the most disconcerting indicators, however, are the "fear and greed" indexes. The VIX measures the implied volatility of the S&P 100; the VXN, the Nasdaq 100. When investors are scared, the indexes soar; when they're optimistic, they tumble. Both gauges have dropped sharply since the conclusion of the war, and the VXN has fallen to a level not seen since 1998. Many market watchers say that kind of confidence--or overconfidence--is almost always a sign of bad things to come. "There's an awful lot of complacency," says David Tice, the well-known short-seller and manager of the Prudent Bear fund. "People feel as if a recovery is baked in, and the market is going to be fine." He expects another big tumble within the next 18 months.

Still, it's important to place any kind of near-term risk in perspective. To prove the point, we asked RiskMetrics Group, a financial analytics company in New York City, to run stress tests on the ten most widely held stocks, according to Merrill Lynch, to determine the effect of some extreme scenarios (see table). According to RiskMetrics, the most serious incident we imagined, another major terrorist attack, would send the ten stocks falling an average of 17%. Would that be painful for U.S. investors? Certainly--as it would be for all Americans. But in the end even another Sept. 11 is surmountable.

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