The Scary Second Half

It also argues for more trouble in sectors like retail and autos, where stocks have already been battered this year.

Just last week, the threat of bankruptcy was raised for General Motors, and the auto giant is reportedly preparing deep job cuts and considering closing or selling some of its brands.

At the same time, investors still have to worry about financials. Banks and other institutions are currently somewhere in the middle of what we can call the "Great Deleveraging." Following the subprime and credit crisis capped off by the failure of Bear Stearns earlier this year, appetites for risk (and new investment) remain largely in check. Monday's drop in government-sponsored lenders Fannie Mae and Freddie Mac on worries over access to capital served as the latest milestone in a credit and mortgage crisis that's on track to generate $1 trillion in losses by some estimates. In the second quarter, financial sector profits are expected to slump by 67 percent.

The fate of a still-hemorrhaging banking sector remains possibly the largest unanswered question for the direction of equities. It's not set in stone that financials have to rise to get the rest of the market back on track, but there's little hope for a substantial recovery while those shares are falling.

So where to invest?

Strategists still tout U.S. large caps, much as they were doing at the start of the year. Back then, the weak dollar and exposure overseas were the main selling points for shares of global firms based in the United States. Now, with overseas market suffering more than the United States from inflation pressures, those same companies are seen as bets worth placing ahead of what many hope will be the beginning of the end later this year, to a recessionary dip that started in late 2007.

"It's going to be a rocky road for the rest of the year, but we would be more invested in stocks. The market is oversold. We could see more sell-offs, but the S&P will be higher at the end of the year than it is now," said Paul Hickey at Bespoke Investments.