Less than two weeks ago, after the

Dow Jones Industrial Average completed its 20% run-up from a three-year low, pundits hailed the return of the bull market. Now they're wondering if it wasn't just a sucker's rally.

"The markets got ahead of themselves," said Jim Volk, co-director of institutional trading at D.A. Davidson. "And now it's a fight between the bulls and the bears." In the face of poor earnings, a volatile international situation, and falling consumer confidence, Volk expects the markets to continue to trend downward in the near term.

The market ended lower yesterday for a second straight session, with heavy losses in Dow stocks. The blue-chip index fell 161 points, or 1.6%, to 9711.86, pressured by news that

Dynegy

(DYN)

had cancelled its proposed acquisition of

Enron

(ENE)

.

The retreat leaves the industrial average nearly 300 points away from 10,000 after coming within 8 points of the mark on Tuesday. The last time it closed above that level -- which traders said holds little technical importance but some psychological significance -- was on Sept. 5.

Expecting to Fly

Still, the Dow Jones Industrial Average is up 18% from a postattack low on Sept. 21, while the

Nasdaq Composite is ahead 33%. The

S&P 500 has risen 17%. But with the economy's ability to fuel continued gains still in question, some fear the market's engine will stop.

"The market rallied in anticipation of good news," said Peter Boockvar, equity strategist at Miller Tabak. "But if it's going to maintain current levels, it's got to get it."

The

Federal Reserve's

latest "beige book" survey of regional conditions found good news in short supply. "Economic activity generally remained soft in October and the first half of November," the Fed said in its report yesterday, "with evidence of additional slowing in most regions outweighing signs of recovery in a few districts."

Among the report's findings: Manufacturing activity deteriorated further, while the retail outlook for the holidays was mixed, with some stores doing better than others. The news came a day after the Conference Board said consumer confidence fell in November to its lowest level in more than seven years, as job losses continued to mount.

Flying on the Ground

And while markets are "forward looking" -- they tend to rebound months before the economy does -- some analysts feel that huge run-ups are not appropriate right now.

In the past month, traders have become increasingly skeptical of a rally led by technology stocks. Short interest, or the number of shorted shares outstanding, rose to a record 4.125 billion shares in mid-November from 4.015 billion in October for Nasdaq stocks.

"Too many large fund managers are short the market," said Sam Ginzburg, managing director of trading at Gruntal. "A lot of smart people think the economy is in bad shape." Short-sellers borrow stocks and sell them in the hope of buying them back at a cheaper price.

One thing going for the market, however, is seasonality. December has been the best-performing month on the S&P 500 over the last 50 years.

That doesn't mean there won't be a correction. A 14.2% rally on the S&P 500 from late January through July of 1990 was succeeded by a 19.9% retracement in the three months afterward, according to data from Ned Davis Research, a market statistical service. And a 19% S&P gain from April to May 2001 led to a 26.4% drop on the index over the next four months.

"I think the market put in its lows in September," said Volk. "But it could retrace 50% of its gains. In fact, that would be normal after this kind of rally."