The Coming Week: Market on Edge Ahead of FOMC Meeting Tuesday

Though the FOMC is unlikely to hike rates, some economists foresee a shift to a tightening bias. What do you think about the week ahead? Tell us on our message boards.
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One day it's the dollar, the next it's a mad

Ballmer, on another it's gold.

And whenever these things happen, you hear a pretty convincing argument why they shouldn't push the market lower. The dollar is doing fine against most currencies, the recent movement having really been a case of yen strength.

Microsoft

(MSFT) - Get Report

has been telling people its stock is overvalued for a long time now -- who cares if its president spells it out. Gold's price spike is all about the limits central banks have put on selling and has nothing to do with what's going on in the economy. And no, there's no

Long Term Capital Management

-esque gold carry trade out there.

The fear passes, stocks perk up a little, and the next big worry scuds in. Stocks fall down some more. And so September passes.

What do you think's in store for the week ahead? Tell us on our

message boards.

Sometimes it seems like the market is just looking for bad news, searching for an excuse to go lower. You start to think maybe all those people who have been talking about how stocks are overvalued are right. Maybe the market finally couldn't bear the strain.

It's a change from the experience of the last couple of years, when very real events came and knocked the market down when it hit high valuation levels. We've gotten used to our big catalysts. It's something to think stocks might keep falling without one.

"I've been worried about a correction of at least 10%, and perhaps 20%, since the beginning of the summer," said Byron Wien, chief investment strategist at

Morgan Stanley Dean Witter

. "I still think we have further to go. I don't think it's a bear market. I just think that valuations have been overextended."

The idea that stocks have some more downside isn't all that rare these days. It is October, after all. Throw a rock on Wall Street, and you'll probably hit someone who thinks stocks are going to have another tough month. There'll be a capitulative selloff, the common wisdom goes, and then we'll run on back up to new highs by the end of the year.

"I think the big surprise is that it's going to go down and stay there," said Wien. His second surprise will be that there will be a rotation in the market. Different stocks will be the leaders. For once, portfolio managers might actually beat the

S&P 500

. If there are any left who aren't closet indexing, that is.

The coming week is a worrisome one for the market, and no doubt the most worrisome thing about it is the

Federal Open Market Committee

meeting on Tuesday. It is unlikely that the FOMC will hike rates, though there is an outside chance that they'll go. The real focus of attention will be the Fed's policy directive -- about half the economists out there think it will go to a tightening bias. For the equity market, that might actually be the worst of all worlds -- it keeps people on the worrying wall until the November Fed meeting. A tightening now, and the perception would be that the Fed's done for the year. It'd cause some pain, sure, but would also help the market put in a rock-solid bottom.

Joe Carson, chief economist at

Deutsche Bank Securities

, is among those who thinks it's a tightening bias on Tuesday and then a tightening on Nov. 16. And while the Treasury market seems to have resolved itself to a Fed that eventually takes back all of last year's cuts, Carson thinks that the central bank will go further than that.

"I think the market is being a little bit complacent," he said. "There's more inflation in the economy in 1999 then we had at any time in 1994

when the Fed was tightening aggressively, and yet no one cares."

Investors will have their share of overseas willies to worry about in the coming week. The

Bank of England

and the

European Central Bank

are both meeting midweek. There's been some chatter in the market that the ECB might raise rates, though it's important to remember that European traders are a little bank-shy since the BOE's surprise hike last month.

More important than those may be the

Bank of Japan's

tankan, set for release Monday. A closely followed sentiment index, it could spark some big moves in dollar/yen. There's been some speculation that it could come in stronger than expected, which could set off another dollar drop. If it comes in below expectations, however, there's a chance that the Bank of Japan would take advantage of the resulting yen weakness to intervene in the currency market and further prop up the dollar.

The week closes with the September

jobs report

-- always a hard thing to predict, and harder still this time around on account of Hurricane Floyd. Some economists, like Carson, think it will have little effect, and others think it will take a chunk out of payrolls. That leaves forecasts all over the place. No matter how the report comes in, someone will be wrong. Could be some volatile trading after that one.