During the 13 weeks ended last Friday, blue chips stocks had gained 38 percent, marking one of the sharpest rises in history. Small cap stocks, as measured by the unweighted average of all stocks on the New York Stock Exchange, fared even better, gaining a whopping 84 percent in that same period with nary a pause. But for all the bullish stock market talk, the major averages have been unable to muster much in the way of a rally since the results of the banks stress test were released in early May.

The problem is plenty of other things are rising as well, including bond yields and commodity prices. These latter two could scuttle a recovery. For instance, the 10-year Treasury that so many consumer loans key off of shot up more than a full percentage point during the past few weeks. And 30-year mortgage rates have risen to 5.5 percent. Although that’s still low by historical standards, we’ll see less refinancing and few new home purchases as a result.

Our banking sector is walking on egg shells as is. The number of problem banks has risen to more than 300. And even though $75 billion in capital has been raised many of the so-called “healthy” banks are on the edge. Yet the Federal Deposit Insurance Corporation (FDIC) is essentially out of money, with only $13 billion in remaining reserves (although its line of credit was recently upped to $500 billion).

Because they’re in such sad shape, the major banks are reluctant to lend these days. And they’re going to be hard pressed to grow their earnings without greater lending. Yet existing loans, running the gamut from commercial loans to home mortgages to auto loans to credit cards continue to deteriorate.

Stocks have inched above their 200-day moving average, enough to increase investor confidence. At the same time, what would have been seen as bullish news just a few weeks ago, is beginning to be ignored. The banks repaying their TARP borrowings is just one example of this. With momentum slowing down, stocks overall will be more prone to setbacks.

One possible trigger for a big decline may have been pulled yesterday afternoon when Supreme Court Justice Ruth Bader Ginsburg put a temporary hold on the government’s unusual bankruptcy plan for Chrysler.

The government-brokered deal to sell the stub of Chrysler to Fiat is a complicated one, but at the heart of the matter is that it is using TARP money (intended for ailing banks) to fund the deal and, in giving the United Auto Workers union an equity stake in the company, the government gave precedence to unsecured creditors ahead of bond holders, who are secured creditors (and therefore higher up in the pecking order). Most of the bondholders were strong-armed into going along with the deal, but a couple of Indiana pension funds (not Wall Street fat cats, mind you) sued to prevent the government’s plan from going through. The matter quickly made its way though the appeals system.

In an unusual turn of events, President Obama, eager to put the matter to rest and limit the economic fallout, decreed that the Supreme Court had no right to rule on the deal (essentially circumventing the rule of law). The Supreme Court, or at least Justice Ginsburg acting as the Circuit Justice, had other ideas.

Ginsberg’s ruling gives her (or the entire Court should she defer to them) additional time to decide on if the sale should proceed as it’s currently structured. If the Court’s final ruling runs counter to the current plan, Chrysler may be forced into liquidation, throwing tens of thousands Chrysler employees out of work. That would inflict further pain on the weak economy.

Regardless of the outcome of the Chrysler situation, our work suggests that the stock market’s upside remains quite limited, while downside risk is considerable. Indeed, we still can’t rule out a test of the March lows. We just can’t say how quickly that decline will unfold: It could occur at any time, but it may take as long as October before we see any real selling pressure.

We’re still getting hammered in many of our trade, and we understand if you’re running short of patience with our recent bearish picks. But we’ll continue to risk your ire knowing just how fast and how far stocks could potentially fall.