Dow reaches 11000. Now what for the stock market?

Like a marathon runner barely crossing the finishing line, the stock market eked out a small gain Monday and pushed the Dow Jones Industrial Average above 11000 for the first time in 18 months.

The Standard & Poor's 500 index also moved up to within a few points of 1200.

These new market highs are either a) confirmation that the rally in stocks is sustainable or b) a signal to take some profits now by selling stock.

Either way, the market looks more fairly valued and certainly more stable than it did on Friday, Sept. 26, 2008, the last time the Dow was above 11000.

Back then, Lehman Brothers had just failed and the Bush administration was rushing to come up with a bank bailout plan. The following Monday, the House of Representatives initially rejected the plan, causing the Dow to fall 777 points, its largest point drop ever.

Now, the economy is rebounding.

"The risk of a double dip recession is falling," says Stephen Freedman, a strategist at UBS Wealth Management Research Americas. The Dow at 11000 "is the stock market acknowledging that the economic picture has normalized."

Where the market goes from here depends on two very different takes on the economy. According to one view, the economy is recovering but not strongly. The other view is that it is still in trouble, burdened by underemployment, lackluster consumer spending, troubled banking assets, and so on.

Americans will find out which view is right later this year when the temporary props of government stimulus and inventory buildup fade and private-sector activity picks up.

It will be like starting a stubborn car, says Len Blum, managing partner at Westwood Capital, a boutique investment bank in New York. "You hope it catches. And if it doesn't catch, the battery is going to die."

He thinks the America's private-sector engine will catch but not rev strongly for some time: "We may not see a really good economy until 2014."

So investors will need to navigate carefully, these analysts say. Mr. Blum suggests buying stocks with both economic futures in mind: cyclical stocks for the recovery scenario and defensive stocks for the stagnation scenario. Either way, he's emphasizing companies that are the leaders in their field.

Mr. Freedman sees more opportunity in emerging-market stocks and, because they're so cheap, British and eurozone stocks. In the US, he suggests underweighting defensive stocks like utilities and health care and emphasizing instead technology, energy, and financial stocks. Large-cap stocks should outdo small-cap stocks, especially large-cap growth stocks.

"You can have some positive returns but in line with long-term averages," he says.