There's nothing like being bludgeoned with a blunt instrument to restore clarity of mind. Three years ago investors were divided. Manic legions believed in the New Economy. Dour historical types saw a Bubble. Today we have a painfully shared vision.

It was a Bubble.

Now we face new questions. Is the Bubble behind us? Is it safe to invest in stocks?

We can find the answer to the first question by checking the benchmarking research done at the Leuthold Group in Minneapolis. For many years the institutional research firm has done a monthly exercise in which they estimated the downside if stocks returned to median multiples of earnings, cash flow, and other measures. During most of the last five years that research showed potential declines of 30 to 50 percent.

According to their August report that danger no longer exists.

The S&P 500 Index would now decline only 8 percent (from its July close of 912) to be at the median valuation level for all the low inflation years from 1926 to the present. An 8 percent decline would take it to 839, a level that is higher than the July 23 low of 797.

In other words, valuations are back to normal and the Bubble is behind us.

A similar exercise with a broader group of 3,000 stocks is even more encouraging. Small and mid capitalization stocks, when benchmarked to historical valuations, would have to appreciate 33 percent to reach median levels. They are currently valued at deep bear market levels--- at the bottom 25 percent of all historic figures.

Researcher Leutholds' conclusion? While the largest capitalization stocks are still somewhat overvalued, the broader market may be a bargain. Trusting indicators over emotion, they're buying.

Does that mean it's 'safe' to invest in stocks again?

Sorry, but no. While the bubble is gone and valuation has returned to normal levels, we have some heavy-duty depressants that could drag the market still lower. Here are the big three.

Mutual Fund Redemptions Will Be a Drag On Stock Prices. Legg Mason analyst Ray DeVoe spent the summer reminding his clients that "capitulation"--- the period when investors walk away in disgust--- is seldom something the lasts for only a month or two. He points out that in the 96 months following the 73-74 bear market, 95 were months of net redemptions.   The record redemptions of July may only be the beginning of a long string of redemptions.

Looking at the immediate future, figures from the Investment Company Institute show that equity mutual funds entered August with very low cash positions--- about 4.6 percent.   This means that any continuation of redemptions will force portfolio managers to sell stocks.

Corporate Pension Earnings Drag. The next shoe to drop in corporate accounting is more subtle than outright fraud, but broadly dangerous. It is the sudden under funding of corporate pension plans. The combination of lower interest rates (which raise the cost of funding a pension) and dramatically lower portfolio returns means many corporations with defined benefit plans will have to add new cash to their pension plans, reducing per share earnings. Basically, corporate earnings will be swimming against a strong current.

The Global Mess. Uncertainty has a way of reducing valuation levels. It did after the Cuba missile crisis in 1962. It did after the first OPEC price increase in 1973. It did after the second OPEC price increase in 1979. And it put the markets on hold when Saddam Hussein invaded Kuwait in 1990. Today we have the uncertainty (and costs) of the war on terrorism, the possible invasion of Iraq, continued (and nuclear) tension between India and Pakistan, escalating violence between Israel and Palestine, and the ongoing implosion of the Japanese banking system.

When it comes to worry, our plate is loaded. All other things being equal, worry tends to reduce valuation levels for stocks. Worry also favors returns that are realized (and paid out) today over returns that are a few years away.

The bottom line? Watch. Don't plunge.