The stock market is known for causing investors radical, abrupt mood changes — many are bullish one day, bearish the next. The latest such change, a sudden swing to a great deal of cheer from widespread despair following Tuesday’s Dow surge of 416.66 points, could prove dangerous, as some pros are viewing it as a buying trap for impressionable investors.

The rally, in what was widely regarded as an oversold market, was largely spurred by the Federal Reserve’s decision to pump $200 billion into the financial system to ease strains in the credit markets. Accompanying that move was a flurry of speculation that the Fed could cut rates by as much as 100 basis points at its March 18 meeting. Heavy short covering also contributed strongly to the rally. Interestingly enough, some pros sold briskly into the rally, theorizing the euphoria was way overdone. The Fed’s action, they believe, will not cure the market’s major ailments: the tide of credit losses, the possibility a recession is looming, and a worsening housing market. The bottom, two pros said, is at least another 10% to 15% away.

“The Fed’s action means the system will not collapse, but the real problem is we face the worst post-World War II recession — one that will run deeper and be considerably more protracted and painful than Wall Street thinks,” Oppenheimer & Co.’s chief investment strategist, Michael Metz, tells me. Most economists, he notes, expect pretty much the same kind of recession we’ve had since 1945 — shallow and lasting about 10 months. This time around, he figures it’ll be different because he says “we’re looking at four or five quarters of negative economic growth, beginning with the current quarter.”

Why so? Because, he says, of the likelihood of a major cutback in spending by overleveraged consumers — including the rich — who are saddled with rising debt and declining asset values and face mounting job losses. In addition, he sees an even worsening real estate picture, including commercial properties, about 80% of which are owned by individuals.

For the next two years, Mr. Metz sees the market “going nowhere,” with the Dow trading in a narrow range between 11,000 and 14,000. Another surprising worrywart is stock market guru Elaine Garzarelli, who has essentially been bullish for nearly 5 1/2 years — a period during which the Dow rocketed more than 6,000 points, to more than 14,000 from 7,740. She’s now humming a very different tune.

In a brief commentary titled “Earnings Down, Recession Here” she just fired off to her 103 institutional clients (representing assets of more than $1 trillion), the CEO of Garzarelli Capital is now saying: Get cautious.

A key reason for that caution: her stock market indicators — currently flashing a bear market reading — are slipping amid a weakening economy and renewed widening of credit spreads.

The debt markets, she observes, are freezing deeper after a full eight months into the crunch, and the contagion is spreading into the safest pockets of the American credit universe. Ms. Garzarelli isn’t projecting any immediate end, she says, because home prices continue to fall, and the annualized rate of decline, 18% in the fourth quarter, is gathering speed. Further, she notes, contagion is moving up the ladder to prime mortgages, commercial property, municipal bonds, home equity loans, car loans, credit cards, and student loans.

Ms. Garzarelli argues that the latest payroll employment figures — three consecutive monthly declines in the number of working Americans — make it clear we’re already in recession.

As a result, she sees a 10%—12% decline in this year’s S&P 500 operating earnings as sales weaken and productivity slows. While this expected downturn compares favorably to the 31% decline in operating earnings during the 2001 recession, Ms. Garzarell is disturbed by the consensus of overly optimistic analysts projecting profit growth this year of 19%.

Based on her 2008 estimates of $72 to $75 a share for the S&P 500’s operating earnings, she views the index as about 10%— 15% overvalued at current levels. Speaking of earnings, Thompson Financial pegs the first-quarter growth rate, based on analyst estimates, at minus 4.3%, a sharp reversal from January 1, when the estimated growth rate for the period was plus 5.7%. Key reason for the change: downward earnings revisions in the financial sector, whose first-quarter profits are pegged at $36.2 billion, versus $57.6 billion in the first quarter of 2007.

One very negative note: If Thompson and Ms. Garzarelli are right in their ultra-negative earnings outlook, it suggests a flood of downward earnings revisions, which is invariably a forerunner of sharply falling stock prices.

In switching to a cautious stance, Ms. Garzarelli suggests investors hedge portfolios by shorting SPY, the S&P 500 exchange-traded fund. For those who cannot hedge, she recommends investing in defensive sectors such as energy, utilities, consumer non-durables, commodities, agriculture, and gold.

Meanwhile, a lot of selling has followed Tuesday’s big gain, strongly suggesting the market skeptics should not be taken lightly.

dandordan@aol.com