The Coming Week: Sudden Late-Summer Vehemence Worries Wall Street History Buffs

The market rallied sharply this week, but risk is still significant for stocks -- and the 1997-98 pattern still seems to hold.
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For some people on Wall Street, the market's recent leg up seems like little more than a bout of temporary insanity.

Oh, sure: Broadly speaking, the rally makes sense. Investors had gotten worked up over the rate picture, with chatter emerging that the

Fed

would raise rates at its August meeting by a half-point, rather than the quarter-point everyone expects. Then there were the typical financial and economic worries. Some people fretted whether margin calls on Internet stocks would spill over into blue-chip techs; others were vexed by the apparent drift of capital from the U.S. toward recovering foreign economies.

It was a too-dour market, deeply oversold and needing only a little capitulative selling -- a little good news -- to turn it on a dime. The capitulation came Tuesday. A drop to precarious technical levels shook out weak holders and found buyers willing to make a stand. The good news came Friday when the

Producer Price Index

came in below expectations, allaying fears that the jump in crude prices and the drought in much of the U.S. would push the key inflation measure higher.

The worry, however, is that stocks are putting on a trading rally -- conforming, as they have all year, to the patterns of 1997 and 1998. People of this mind fear we're now riding the late-summer bounce that precedes an even more wrenching decline.

"I am definitely not a trader, but if I were a trader, I would be selling into this rally," said Doug Cliggott, equity strategist at

J.P. Morgan

. "Economic growth continues to surprise to the upside, bond yields are up and the Fed is in tightening mode. I think the risk level in the equity market is still very high."

There's certainly a case to be made for the market retesting its lows. While the market has fully priced in a 25-basis-point hike at the next Fed meeting, more signs of wage pressures in the next round of economic data could set investors worrying about an October hike. Continued recovery in overseas economies, particularly Japan, could renew pressure on the dollar -- movement in which lately has had a pretty strong correlation with stocks. And then October has been such a lousy month to be in stocks that some people will want to get the hell out of the market just for the sake of getting out.

But for now, these are back-burner concerns. Barring an unexpectedly strong

Consumer Price Index

on Tuesday -- the last key economic report between now and the Fed meeting -- this rally looks like it has the legs to carry it through the coming week and more.

"People are thinking of selling into the rally, but nobody is yet," said Sam Ginzburg, managing director of equity trading at

Gruntal

. "There are still a lot of stocks on everybody's list that they want to buy."

The Treasuries, too, are looking healthier than they have in weeks. "The PPI number was clearly good, the refunding is over, yields are still at very attractive levels -- we would expect the market to get better through the next few weeks," said Richard Gilhooly, senior bond market strategist at

Paribas Capital Markets

.

Indeed, Treasury yields may have hit their peaks, according to

Banc of America Securities

chief economist Mickey Levy. "Domestic demand growth is beginning to decline and money growth has been in a clearly decelerating path," he said. Because of those signs of economic cooling, Levy thinks the likely hike at the Aug. 24

Federal Open Market Committee

meeting will be the last.

But Cliggott worries that fresh gains in the stock market will heat consumer demand back up, raising the specter of a second rate hike.

"The goal at the end of the day is to slow demand, and I guess to do that, you have to make it hurt a little bit," he said. "That's how you do it. People don't smile and say, 'You know what? Let's not go to

Home Depot

(HD) - Get Report

.' They wring their hands and say, 'We can't go to Home Depot.' "