The Coming Week: The Market, Fickle and Weak, Is Nevertheless Coping

Meanwhile, the Bank of Japan sits on the cusp of a financial faux pas.
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It goes up, it goes down. It goes up, it goes down. For nearly six months now, the stock market has seemed fickle as a cat.

An investor who sold every time the

S&P 500

got up around 1370 and bought every time it dipped down toward 1280 could have made pretty good money. Most others have been running in place. Or worse.

"The technical position of the market is very, very weak," said Stanley Nabi, chief investment manager for

DLJ Investment Management

. "The leadership in the market is very narrow, very weak, and the new highs are just puny."

It's a market that has not even handled good news very well. The third quarter is winding to a close, and when earnings season starts in October, it looks like the news will be good -- industry analysts are expecting the numbers to come in 20% ahead of last year, according to

First Call/Thomson Financial

. Moreover, there have been a string of good economic reports this month -- the only really major one that was sour was

retail sales

. Yet for all these positives, stocks have not gotten very far this month. Seems to Nabi, who suspects the

Federal Open Market Committee

will tighten one more time before year-end, like a market with an accident waiting to happen to it.

But not a terribly bad accident. "I think we probably will have a correction by the end of the year," he said. "It's a correction in a bull market. I'm not anticipating a very big decline -- maybe 10% from here and then we'll be off to the races again."

Nabi's expected decline would pull stocks below the range they've been in and would complete a head-and-shoulders pattern that, according to Dick Dickson, technical analyst at

Scott & Stringfellow

, "everyone and his dog has recognized." And that, thinks Dickson, probably means it's not going to happen.

Instead, he thinks stocks will remain caught in a range. Friday's bounce off the 200-day moving average on the S&P 500 average will likely be met with selling once it touches 1375 or so. Eventually, though not just yet, stocks will probably break out of that range -- maybe once people get straightened out on what the Fed's going to do. The end of October usually starts a strong period for the market, and Dickson thinks things might get moving then.

If there is a problem for the market right now, it is the dollar's slide against the yen. With the G8 finance ministers set to meet next weekend, talk has run rife that a coordinated intervention to shore up the greenback -- so far it's been just the

Bank of Japan

-- is getting brokered. It's very clear that the Japanese policy makers would like the U.S. to join them in intervening. They worry that a strong yen will hurt exporters' profit and introduce deflationary pricing pressures at home, snuffing economic recovery.

There has also been chatter that Japan is considering -- at the U.S.' behest -- unsterilized intervention. That means that the

Bank of Japan

would not, as per usual, sop up the yen pumped into the system during intervention, effectively easing monetary policy. It would be a pretty radical move for the BOJ -- unsterilized intervention is considered a somewhat gauche thing for a major industrial country to do, lying somewhere between eating shrimp with one's salad fork and running down the street naked.

Sterilized or not, there's a growing consensus in the market that's saying the U.S. helps out on intervention, or else. "One that just consists of the BOJ acting solely is not going to do anything," said Kevin Flanagan, money market economist at

Morgan Stanley Dean Witter

. "If there's no joint action, you could see the dollar go through par

100 yen pretty quickly."