Earlier this month, after nearly a two-month surge in stock prices, the bright people at Goldman Sachs (GS) issued a report describing the multi-week rally as a “false dawn.”

“We expect a ‘false dawn’ as good news precedes bad news,” analysts at the venerable investment firm wrote.

Turns out they might be right -- again. On March 10, the Dow Jones Industrial average hit a 2008 low of 11,740. On May 19, the Dow had climbed 10% to 13,028. And that despite a miserable economy and record high fuel prices.  

But the Dow is down more than 4% this week alone.

Fund managers and traders said their mindset has completely flip-flopped from a week ago. Last week, everyone thought stocks could only go up. Now everyone thinks it can only go down.

“[On Monday] I couldn’t have been more positive about the direction the market was going … but I guess we didn’t read the tea leaves. We should have seen this coming,” Ted Weisberg of Seaport Securities told FOX Business on Wednesday.

The recent rally was impressive. At one point, the Dow was within 1.5% of breaking even for the year.

But if the stock market was in such a rally, what happened to halt it?

Fund managers and traders said the market finally realized that bad economic data and poor company earnings couldn't add up to a strong stock market.

“If you look at what’s happened to energy prices, inflation and the possibility of higher interest rates, the problems have just become much more visible recently,” said Steve Neimeth, a portfolio manager with AIG SunAmerica Asset Management. “If the market was a game of cards, we’ve got nothing but twos and threes.”

The biggest disappointment on the economic front was the Federal Reserve’s report on Wednesday in which the central bank reduced its prediction for economic growth and raised its expectations for inflation and unemployment.

The Fed now sees the U.S. economy growing at a 0.3% to 1.2% pace for 2008, down from its previous economic growth forecast of 1.3% to 2%.

“Whatever data the Fed was looking at it’s clearly getting worse,” Neimeth said. “We were all banking on a first and second quarter slumping economy and a recovery later this year. I don’t see that recovery in the Fed’s comments anymore.”

There’s also the concern about the price of oil.

When the economic stimulus package passed in February, the general consensus was that consumers, whose spending makes up 70% of the U.S. economy, would purchase televisions, refrigerators and clothing.

But since February, the price of fuel has skyrocketed. The wholesale price for a gallon of gas has jumped from $2.60 in February to $3.35 on Thursday – that’s a 28% increase.

“Whatever fantasy we had about consumers spending those rebate checks on goods was taken away by the reality of the price of fuel,” Neimeth said. “The recent run up in fuel prices have more than offset whatever the rebate checks would have provided.”