Very few participants expected the market to rally as sharply as it did from Aug. 6 through Tuesday, when the major averages each rose between 11.8% and 15.6%. Fewer expected stocks to keep rallying unabated, so Tuesday's setback was not terribly shocking.

The Dow Jones Industrial Average fell 1.3% to 8872.07, the S&P 500 shed 1.4% to 937.43 and the Nasdaq Composite lost 1.3% to 1376.59.

Weakness in equities proved a boon for Treasuries as the price of the benchmark 10-year note rose 1 3/32 to 101 27/32, its yield falling to 4.15%.

Among the catalysts cited for the equity market's decline were a UBS Warburg downgrade of Baby Bells SBC Communications ( SBC), BellSouth ( BLS) and Verizon ( VZ), and a Morgan Stanley downgrade of Agilent Technologies ( A); the firms' shares fell between 4.5% and 7.6%.

Additionally, oil prices rose to more than $30 per barrel, contributing to growing concerns about the outlook for the global economy. That, in turn, aided gold and related shares while the dollar experienced modest weakness. The Philadelphia Stock Exchange Gold & Silver Index rose 0.4% while the Dollar Index slid 0.21 to 107.51.

Meanwhile, the government said the U.S. June trade gap came in at $37.2 billion, slightly narrower than the $37.4 billion consensus but the largest July gap since 1994. Also, the federal deficit is $147.2 billion with just two months to go in the fiscal year, vs. a surplus of $171.8 billion at the same time last year.

Renewed weakness in Brazilian financial markets, which extended into Chile, also unnerved traders. So did (literally) CNN footage of reported chemical tests by Al Qaeda and news that 70 people were evacuated from a Hotels.com facility in Texas, although the firm refuted reports that anthrax was found.

All that said (and written), stocks were technically overextended after their recent substantial gains, so some near-term setback was likely.

What's up for debate, however, is the likely path for equities going forward. Monday , I wrote that the recent rally was of the Rodney Dangerfield variety ("no respect") and that most observers would be surprised if equities showed much strength past Labor Day.

"The risk here is not staying cautious too long, it is turning extremely bullish too soon," Jeffrey Saut, chief equity strategist at Raymond James, commented Monday. Judging by the emails I've received, that view is shared by many readers.

Maybe that means only like-minded folks are still around and care enough about stocks to keep reading this column. Still, from a contrarian point of view, a rise in skepticism would be healthy for the market and might suggest the rally will resume shortly, and prove stronger than expected.

No Guts, No Glory, No Money

Of course, sentiment is a tricky thing to measure and has a great deal to do with one's perception. Bulls will tell you that "everyone" is bearish while the skeptics believe the contrary.

"This rally has been a typical bear market rally because sentiment is starting to swing to the bullish side," said Steve Hochberg, the bearish co-editor of the Elliott Wave Financial Forecast in Atlanta. As evidence, he cited a drop in put buying -- Tuesday the CBOE equity put/call ratio fell to 0.65 -- while others have observed the decline in the CBOE Market Volatility Index. The VIX rose 3.1% Tuesday to 32.56, but it has come down rapidly from its high of 56.74 on July 24.

Hochberg also sees a consensus expectation for a possible "retest" of the late-July lows sometime in September-October, but nothing worse than that. "No one is expecting a big, sharp break -- everyone is saying July 24 is the low," he said. "I'm seeing something more bearish."

In fact, he's forecasting a break "significantly below" the Dow's July low of 7532.66 sometime in late September/early October. A break where "people start to get worried again" setting up shares for a "more solid low" in the fall, he said. Such a fall low would coincide with the four-year Elliott Wave cycle and, coincidentally, also would fit with the market's historic seasonal patterns.

Hochberg recommended most individual investors go to cash in anticipation of that event. If you're sitting in a money market fund earning 1.5%, "the worst thing is you'll earn less money if we're wrong," he said. "There's an opportunity cost but, at least you'll be safe and won't have lost a penny."

No Remorse, No Regret

For those who've inquired, Hochberg said the fourth wave cited here on July 15 was very short-lived and quickly gave way to the fifth (down) wave, which culminated on July 24. That means a new wave pattern has begun; since the July low, the market has been "correcting the entire decline" from the March 19 highs to the July 24 lows, he said.

For all this talk about relatively short-term wave patterns, it should be noted that Hochberg believes a secular bear market began in 2000 and will last the better part of this decade, and possibly beyond. In terms of time, he compared the current bear to the 1966 to 1982 experience, during which a number of "mini-bull and mini-bear" markets occurred but the Dow essentially was flat.

In terms of price, Hochberg cited the U.S from 1929-32 and Japan's experience after the Nikkei's 1989 peak as the most likely patterns stocks will follow "because we just came through a mania," as was the case in the eras preceding those declines.

"The Nasdaq is already down 70% from its peak but the Dow will get down into that range" over time, he said. "Valuations are still typical of bull market highs and you don't make a major bear market low at these levels."

Certainly, it's considered untoward, impolite and even unpatriotic to make comparisons to the 1930s. But "it's only gloom and doom if you're long," Hochberg said, stressing that he's not foreseeing or forecasting breadlines and 25% unemployment. "To me the doom and gloomers are the bulls who are sucking you in. If we're even half right, a lot of people are going to be decimated."
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.