TORONTO (Reuters) - There was a golden moment for Canadian stocks this past week when the Toronto market's main index powered to a record high, reversing losses triggered by last year's credit crunch and concern about the U.S. economy.

But there's lead beneath the golden glimmer: the recovery is deeply lopsided, and cash is still king for many investors.

Some market sectors remain well below levels they hit last year, and a lot of Canadian money is parked in safe fixed-income assets.

"Investors are sacrificing billions of dollars in potential investment gains," said Benjamin Tal, an economist at CIBC World Markets.

Tal calculates that some C$45 billion ($45 billion) of "excess liquidity" is held in cash instruments rather than in the stock market because investors are still frightened by the market downturn that followed last summer's credit crunch.

Noting that it is traditional to have a delay between the end of a downturn and the return of investor confidence, he said the October 1987 market correction lasted two months, but investors took 16 months to reduce excess liquidity positions, even as the stock market gained more than 20 percent.

The same happened in 2001 and is happening again now.

"That's human nature, and that is usually a very common mistake, and I suspect they will repeat this mistake," Tal said.

The Toronto Stock Exchange's main index closed at 14,984.20 points on Friday, up 3.2 percent on the week and 8.3 percent since the start of the year. Before this past week the market's record high was 14,646.82, set in July 2007.

The latest rise in the market, however, masks the fact that investors remain worried about how Canada can cope with deep problems in the United States, where inflation is rising even as the economy slows.

"The longer they (the United States) continue to struggle, the more vulnerable we are going to be," said Rick Hutcheon, president and chief operating officer at RKH Investments. "So far it hasn't hurt us too much, but that may change. If that goes on and on in the United States, eventually it would slop through the border."

Hutcheon said sidelined money will start flowing into the market when confidence in the United States returns.

"There's lots of cash on the sidelines and you have to rebuild investors' confidence before that's coming back... We have to see some positive trends developing in the U.S. market before you're going get people waving the green flags saying it is safe to get back in the Canadian waters all together."

The United States is Canada's largest trading partner by far, so a U.S. downturn always hits export-oriented Canada hard.

Hutcheon said gold, energy and natural resources have been behind the market's recovery, and investors need to see a broader improvement before they reduce cash positions.

"The broader market is not doing that well but it's been masked by a superb performance by a half dozen stocks," he said. "If that doesn't broaden out into the industrials and banks and consumer staple-type stocks... Canadian investors will not have a sufficient level of confidence to redeploy their capital."

Douglas Davis, president at Davis-Rea in Toronto, agrees that the recovery in the market is not broad-based and there would be good reason to have a bear market right now.

"What we've seen is the greatest contraction on credit since the Depression," he said.

"Normally a down market doesn't conclude as quickly as this one seems to have done. A bear market is not generally so short."

($1=$1.00 Canadian)

(Editing by Janet Guttsman)

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