For the second week in a row, the action in the

Nasdaq Composite Index

has been more likely to result in investors raising a glass at the end of the day than crying into their beer. What's emerged in the last two weeks is a renewed sense of judicious, measured investing, focused on earnings, valuation and companies that have strong growth prospects.

Now, within that fundamental analysis looms the

Fed

-- and that possible 50-basis-point hike. The uncertainty of a potentially more aggressive Fed will make gaming the market much harder in the coming weeks.

The game has been waking up in the morning and testing the winds --

Microsoft's

(MSFT) - Get Report

call is disappointing? Sell tech and buy

Dow

stocks. The Fed's going to get more aggressive? Sell Dow stocks and buy tech.

Now that a significant number of people think the Fed is going to increase the funds rate by 50 basis points on May 16, that's going to put a crimp in the market's desire to rise higher next week.

Staying the Course

Several 2-ton economic reports, including the

productivity and unit labor costs and the

employment report, along with the

Beige Book, are sure to keep the Fed's intentions at the center of the market debate next week.

It's telling that the market didn't flinch Thursday on the release of the

Employment Cost Index and the

Gross Domestic Product reports, both of which displayed rising inflation in wage and consumer costs. Sure, the market fell initially, but equities recovered smartly and tech stocks were even stronger on Friday.

It could be that the stock market isn't fully convinced that the Fed's got the guts to go 50 basis points -- and certainly Fed chairman

Alan Greenspan

hasn't given due warning of that yet. (He does speak Thursday, but his topic is alternative financial delivery systems.)

Or, it's just that the market has extreme confidence in stocks. Years of buying the dip have proven to be the best investment one can make. Anecdotally, it seems the recent skittishness may have been most pronounced among institutions with quarterly performance measures and the threat of redemptions to worry about, rather than individuals looking to invest for the next 15 to 20 years, pouring cash into the market.

Save for a severe market event, the stock market may stand resilient, despite next week's economic data. The productivity report is released Thursday. This release has been a joy for the market -- the fourth quarter's 6.4% increase was the highest since the 7.4% increase in the fourth quarter of 1992. On a year-over-year basis, productivity is rising at a 3.6% rate, a rate the Fed doesn't believe will persist.

However, the market is on heightened alert following the 1.4% rise in the Employment Cost Index, bringing the year-over-year rate to 4.3%, the highest since 1991. In addition, GDP slowed to 5.4% -- something the Fed wants -- but the report's inflation indicator, the

implicit price deflator

, rose to 2.7%, something the Fed most decidedly does not want to see.

"Given the concerns about inflationary pressures, that's going to be the number for the week," said Gemma Wright, director of market strategy at

Barclays Capital

, which expects the productivity figure to come in low, at about 2.5%. Barclays is also looking for the Fed to hike rates by 50 basis points, based on recent reports.

Could the market overcome such a figure? Probably, but the bulk of the strength will be concentrated in the big-cap Nasdaq names. Since December, the Dow Jones Industrial Average has been in a trading range and, since hitting its highs in January, any strength it has mustered has been mostly a reaction to Nasdaq weakness. (It's assumed the role formerly reserved for bonds -- defense against slumping growth stocks.)

No, what people are doing, for the most part, is retreating into the new defensive stocks: companies with big earnings and very strong growth prospects. That includes companies like

Cisco

(CSCO) - Get Report

and

Oracle

(ORCL) - Get Report

.

"People understand that this is long-term stuff and nobody is panicking," says Mike Vogelzang, president and chief investment officer at

Boston Advisors

, a unit of

Advest

. "The investing public is actually very smart."

Microsoft, Schmicrosoft

So another violent total market response to Microsoft's news doesn't look to be in the cards. The

Justice Department

announced, postclose Friday, that it was recommending a horizontal breakup of the company, separating the Office application component from the rest of the operation. But that's been well-known in the market since Monday, when published reports announced the DOJ's intentions.

"It was a catalyst that helped drive the market down generally when there was a lot of nervousness about technology valuations," said Jim Lucier, senior analyst at

Prudential Securities

. "But we've had a fairly complete set of the facts for several days by now -- any real impact is already discounted."

As is the impact of Friday's employment report. The consensus is for a 340,000 increase in nonfarm payrolls and a drop in the unemployment rate to 4%. Well, duh -- labor markets are tight. The market's well aware of that, and only a drop in the unemployment rate below 4% -- or an increase in average hourly wages at a rate much greater than the expected 0.3% -- will truly put the market on its back.

Or until Alan Greenspan opens his mouth and lets us all know what's coming.