Market Relieved by Friday's Rally -- and Worried About Asia

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Tragedy narrowly averted.

That is perhaps the theme for the coming week, for things looked rather shaky for stocks going forward until the last hour of trading on Friday. With the

Dow Jones Industrial Average

below 8750 and the

S&P 500

below 1080 -- the magic numbers that the market's bounced off of in the past -- traders were bracing for a new foray into negative territory. The rally into the positive column took a load off Wall Street's mind.

"I think temporarily we made a bottom here," said Robert Dickey, managing director of technical analysis at

Dain Rauscher

in Minneapolis. "I would have liked to have seen more volume, better advance/decline numbers, more new highs, but we're still alive. It's unusual to see people step in and buy in the face of uncertainty. I think we'll see some good strength early in the week."

Dickey believes, however, that the market's upside continues to be limited -- just as stocks have continued to bounce off the same lows, so too have they run into resistance at the same highs. "I think the S&P will get back to 1120, 1125," said Dickey. "We've had the market rally there six times in the last two months. Here we go again. If you like a roller-coaster market, you're going to like the next few weeks, too."

Though the jittery market may be great for savvy day traders, it's been tougher for those who focus on the longer term.

"I think everything is coming to a head," said Hany Gobreial, equity strategist at

CIBC Oppenheimer

, who admits that he's been doing a bit of hand-holding with nervous clients lately. "You're right in the middle of the preannouncement period, and then June is usually a soft month for tech, and then you have this Asia thing." Given the shakiness of the market, Gobreial advises focusing on consumer areas and defensive growth sectors -- finance and health care are two -- and staying away from tech until earnings season gets under way.

Though investors may take some solace from Friday's action, the trouble in Asia will likely keep much of Wall Street reaching for the Halcion this weekend.

The jitters are focused on the yen, which slipped to a new eight-year low on Friday. Further declines in the yen will raise more fears that China will devalue the renminbi, forcing another drop in Asia that could, in the words of

Lehman Brothers

chief equity strategist Jeffrey Applegate, "make the 1997 global equity correction appear modest." Applegate is probably the last guy on Wall Street who thinks that will happen, but that is the risk. And that makes it seem like the

Treasury Department

is playing a very dangerous game of economic chicken.

At issue is Japan's reluctance, thus far, to flush out the bad loans in its banking system. Indications are that Japan may indeed be moving in that direction (as

TheStreet.com

reported

Thursday), and Friday's release showing that Japanese

gross domestic product

decreased by a surprising 1.3% may force the country's conservative leaders to action.

Treasury Secretary Robert Rubin's

speech on Thursday made it very clear that the U.S. wants to see genuine reform in Japan, and that the U.S. will let the yen fall until that happens.

"The gauntlet's being laid on the table by the U.S.," said Bill Sullivan, chief money-market economist at

Morgan Stanley Dean Witter

. "I'm wondering if the true policy of the U.S. is to allow the yen to falter until politicians in Japan do something."

Inherent in that strategy are tremendous risks. Japan is unlikely to formulate the kind of bailout package the U.S. would like to see until just after the July 12 upper-house election. And between now and July 12 there is time -- time for the yen to fall, time for Asia to begin that second leg down, time for things to get so bad that nobody can do anything about it. "The forces at hand may be so powerful that even a coordinated effort by the

G7

will not work," said Sullivan.

At issue is not so much whether or not the yen will fall further -- for, barring an intervention, most strategists think it will continue to weaken -- but how quickly it falls. It is almost like a race in slow motion. Will the yen fall too far before the July 4 weekend, when it will likely pull back on fears of a unilateral intervention by the

Bank of Japan

? Or will Rubin & Co. put just the right finesse on the yen's fall, keeping it in bounds, but letting it stay weak enough to scare the pants off Japanese government officials and, heck, make them maybe actually do something for once in their lives?

"The yen will continue to weaken -- the question is if this pace can be sustained," said Jamie Coleman, senior foreign exchange analyst at

Technical Data

. "I think we'll see some consolidation in coming days before we begin to weaken." Interesting times.

Though there are some pretty important economic data coming out -- the May

Consumer Price Index

on Tuesday and April

international trade

figures on Thursday stick out -- the Treasury market will be pretty focused on that Asian thing.

"We have a slew of economic data to consider, but we want to make it clear that economic data have been rendered to secondary status," said Sullivan. He notes that the

Fed Chairman Alan Greenspan

, in his

testimony

on Wednesday, indicated that the Fed is not likely to tighten, and that the

Federal Open Market Committee

itself is fearful of what may happen in Asia. Within that context, Sullivan believes, the Treasury market may reach new highs next week, so long as the G7 makes no moves to intervene on the yen's behalf.

"Without that coordinated intervention, look for a new low-yield watermark on intermediate and long-term yields and look to the mindset moving in the U.S. to where the next move is an ease," Sullivan said.