03/20/2010 05:12 am ET Updated May 25, 2011

Who Says the Bad News Is Over?

Sometimes, it takes a swift kick in the can to wake us up to reality.

That may have occurred last Friday when the on-fire stock market -- up nearly 70% in the past 10 months -- took a mini-drubbing as the Dow got hammered for close to a 101-point loss, its first triple-digit decline of the year.

That occurred after banking biggie JPMorgan Chase, which announced an imposing $3.28 billion fourth-quarter profit, stung the market with its additional disclosure that it was too soon to say that losses on its mortgages and other loans had peaked.

The inference was clear and worrisome: Namely, the Samson of the banking industry, plus a number of its peers, could be slammed for additional loan losses this year -- meaning, of course, more bank writeoffs, more banking earnings shortfalls and an increasingly less willingness to lend.

Disappointing consumer sentiment numbers also added to the day's market drop.

Clearly, that surprising triple-digit loss gave Wall Street's sunshine crowd pause for thought. Money manager Tom Postin of Los Angeles-based P&W Partners probably best summed up Wall Street's worry. "The message we got, contrary to what a lot of investors think, is that everything this year ain't about to come up roses, that the days of absolution for shortfalls and disappointments are over. It also makes you wonder how many more land mines are out there."

As Postin sees it, "Sleepy Wall Street, which seems to be operating on the premise that we're in an unstoppable bull market, got a wake-up call from JP Morgan that shouldn't be ignored." He's also in the camp that questions the vigor of the economic recovery, citing such impediments as lofty unemployment, the likelihood that the tempo of new job creations by a wary Corporate America will be painfully slow, the reluctance of banks to lend and no quick fix for housing.

"With Wall Street's bullish horde growing rapidly and a lot of liquidity on the sidelines, I think the market's got temporary momentum here," he says, but we're also keeping a close eye on the exit door."

Three of his favorite stocks are Lincoln National, Schlumberger and Qualcomm, each of which, he believes, could deliver about a 20% gain before year end from current levels.

The $64,000 question, of course, is what's next for stocks? British-born economist JC Spender says he's no poker player, but he thinks "this is a good time to fold 'em." Anyone who got on the elevator at the beginning, then rode it up and gets off now will have a lot to be pleased about, he believes. "What makes sense now is a little humility, rather than greed," he says, "because the probable course for the market from here is to wobble along at the same level."

What disturbs him, he tells me, is that "we're still wedded to the notion that we know what's going on when we don't, that the crises have gone away, which they haven't, and that it's okay to stop worrying, which it isn't,"

However, Spender, professor of economics at the Open University School of Business in Milton Keynes, U.K., and a noted academic, expects reality to come home to roost, when:

-- The government stimulus runs out.

-- Bad commercial real estate loans start hitting the banks big time.

-- The international situation unwinds (a reference to a rising number of Greece and Dubai-like foreign debt problems that could spread to the United Kingdom, Spain and some Eastern European countries.

-- There's no quick resolve to high unemployment.

To Spender, the uncertainties and risks make it irrational for people to stop worrying.

Remember that catchy song? Enjoy yourself, it's later than you think. It also mirrors the market outlook of Harry Dent, Jr., a newsletter writer and author in Tampa, Florida, who sees limited money-making opportunities in the stock market and is extremely bearish. After a minor correction in early to mid January, he sees stocks edging up over the short run to somewhat above 11,300 in the Dow (now about 10,609) as signs of an economic recovery continue to emerge, but then peaking in late February or early March.

After that, he sees the roof caving in, with a crash kicking off in May and knocking the Dow down to about 3,800 by early November.

Dent figures the economic recovery is on borrowed time and will begin petering out in May or June, following which he sees an accelerated downturn that will push the unemployment rate from its current 10% to 15%-16% by the first or second quarter of 2011.

As part of his dire economic scenario, he calculates that either the ticking time bomb of rising defaults will create the next banking meltdown or a strong recovery will promote rising interest rates, which will ultimately tank the real estate and stock markets and fuel the next slowdown in the economy. He figures it is likely that both will impact the housing recovery negatively by the late summer.

Before then, 'though, he expects rising mortgage rests and defaults to kill the housing recovery, probably starting around August and accelerating into early to mid 2011. Last year, there were nearly four million foreclosures and Dent sees endless more for years to come.

His favorite investments now: T-bills and cash. "It makes all the sense in the world to play it safe," he says.

The Sun Also Rises was one of Hemingway's great works. Our worriers suggest Wall Street should keep in mind something equally obvious -- namely, the sun also sets.

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