News of the $700 billion rescue package intended to bail out the country’s floundering financial system was greeted with both cheer and fear by Wall Street’s fraternity of market-watchers. The cheer stems from a belief that the rescue plan is a much-needed confidence builder. The fear reflects the awareness that, Washington’s life preserver notwithstanding, there is no overnight cure for the bevy of ills that have plagued markets since last October, stripping it of more than $3 trillion of market value and in excess of 3,000 points in the Dow Jones Industrial Average.

“The market danger is still substantial,” a former investment strategist at Goldman Sachs, Fred Dickson, says. In particular, he points to a worsening liquidity squeeze in the banking system as corporate treasurers draw down their lines of credit and pull money out of the weaker banks. Equally disturbing, he points out, many banks are aggravating the crisis by refusing to lend to other banks.

A number of other worrisome factors include the significant economic slowdown; the almost certain weak third-quarter earnings with lots of sizable profit misses; the certainty of substantial December cash outflows from hedge funds creating additional pressure on stocks, and an increasingly grim outlook for 2009.

As a result, Mr. Dickson, the chief investment strategist of regional brokerage D.A. Davidson & Co. of Great Falls, Mont., says: “The market will be lucky to get away with a flat fourth quarter.” Over the next three months he says he sees at best a narrow trading range for the Dow of between 10,500 and 11,500. “Further, if there’s no resolution of the bank liquidity crisis soon, the market is going down another 20% from here,” he says.

“Wall Street might want to forget about Santa this year,” Mr. Dickson adds. “He might well pull a disappearing act.”

Although he’s urging clients to turn much more conservative by building cash reserves (a portfolio minimum of at least 15%) and ditching any margin of debt, he does favor a trio of stocks — Exxon Mobil, Bristol-Myers Squibb, and Intel.

A New Jersey money manager, Henry Gault, who supervises about $17 million of retirement funds for family members and some close friends, also doesn’t see the rescue package as a sustained market-booster. “We could see a temporary rally, but I would sell into it, not buy into it,” he says, noting that Wall Street is simply afflicted with too many woes to take a sunny view of the market.

Last February, with bearish sentiment rampant, Mr. Gault e-mailed me a message saying, “The market reminds me of the Titanic.” I chuckled, thinking he was way too pessimistic. Given the market’s subsequent wicked decline, I was wrong and he was dead-on.

Over the weekend, he reminded me of his comment. “Bailout or no bailout, I would still man the lifeboats,” he says. Even with a bailout plan, the market fundamentals look so sour that he says he believes the Dow could drop a lot more, perhaps even to the 2002 low of 7,200.

He points to the sour fundamentals of an ongoing disarray in the credit and housing markets; a rising number of corporate failures; a slowdown in economies worldwide; the ill effects of $100-a-barrel oil or even higher prices, and the uncertainty of what’s ahead from a new president.

The possibility of a 7,200 Dow — nearly a 5,000-point drop from current levels — may seem extreme, but so too is the fear among stock players. Indicative of the widespread fear is this month’s awesome outburst of $38 billion of equity mutual fund outflows through September 24 — the highest level of such sales since January, according to West Coast liquidity tracker TrimTabs Research.

The sellers, incidentally, include Mr. Gault, who has turned increasingly cautious, fattening his cash reserves — usually 10% to 12% of his assets — to 42%, the highest ever in his eight-year history. He has also sharply reduced the holdings in his three favorite stocks — McDonald’s, Proctor & Gamble, and Wal-Mart. “I guess I’ll miss part of the next big 500-point Dow rally that everyone says is just around the corner, but I’d rather miss it than be dead,” he says.

Speaking of rallies, Mr. Gault says some are outright dangerous. He notes, for example, that after every big up day in the market, someone calls him with a cheap stock story that he’s told he has to own. The problem, he says, is they invariably wind up cheaper a few days later.

“You can’t imagine how many guys tout the financials,” he observes. Some days, some of the banks, such as Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup, shoot up on good news, and the next day they collapse on bad news. It’s not something that’s happening monthly or weekly, but it’s becoming practically a daily occurrence. I’m now taking a pass. Let somebody else play Russian roulette.”

dandordan@aol.com