STOCKS PUSHED TO THEIR HIGHEST LEVEL in nearly 16 months only to pull back 5.1% over three quick, repentant days, and the sudden swerve makes at least one thing clear: We are a jumpy bunch these days.

Much could be made of this about-turn. The three-day toll was the worst since this frequently-dissed, oft-doubted bull market began last March. It also wiped out stocks’ early 2010 gains, worrying those who believe January trading sets the tone for the year. Yet stocks had run up 70% without any setback worse than 7%, and it remains to be seen if last week was another bump along the road to recovery or the start of a bigger correction.

The selling jag, however, showed how concerned investors have become about monetary policy and regulatory meddling. Stocks’ swoon began after Chinese banking regulators took early steps to curb its lending boom, and continued as President Obama proposed limiting the risks big banks can take. Any such proposal won’t take effect soon, but the fear is that risk-averse banks will retreat further from lending — just when the economy needs it most.

Selling accelerated Friday afternoon amid reports that the Senate lacks the votes needed to confirm Ben Bernanke as Federal Reserve chairman — and thereby extend his policy of monetary largesse. Risky assets fell hard and Treasuries rallied. In the options market, the rush for protective puts sent the VIX volatility index up 55% in three days — a measure of how everyone was watching the exit.

Material and metal stocks most sensitive to Asian growth suffered, and crude oil fell 4.9%. The Dow Jones Industrial Average slumped to its third loss in four weeks and ended the week down 437, or 4.1%, to 10173.  The S&P 500 is now in the red for the first time this year. The Nasdaq Composite Index lost 83, or 3.6%, to 2205, while the Russell 2000 slipped 21, or 3.3%, to 617.
Why so jumpy? For a start, it is bonus season on Wall Street, and things are tense this year. Higher stock prices also brought higher expectations, and the strain showed. Google (ticker: GOOG) fell 6% after it reported a 17% jump in revenue, while American Express (AXP) fell 8% after it tripled quarterly income. Starbucks’ (SBUX) U.S. sales increased for the first time since 2008, but that didn’t appease the crowd. Pricey casino stocks with Macau perches sagged under the prospect of tightening credit in China, and any impact that might have on the high-rollers crowding their baccarat tables.

Is China really the next bubble ready to burst? The Shanghai Composite Index has stalled since August but is just 10% off its recent peak, so a further retreat isn’t out of the question. But Chinese stock prices, volatile though they are, aren’t excessive compared to their 10-year average, and markets like India have rebounded more resoundingly. “Modest tightening now by Chinese authorities to cool rapid liquidity and white-hot growth is likely to help preserve the expansion, instead of derailing it,” says one Wall Street economist (Source: Barrons Online).