The Coming Week: When Things Are Looking Good, Look Out! - TheStreet

The Coming Week: When Things Are Looking Good, Look Out!

Last week ended strong, so why worry?
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This past week featured the kind of rally momentum guys used to set their watches to.

Which means it won't happen next week.

At the beginning of last week, sentiment was improved, but the market still was coping with the

Nasdaq Composite Index near the year's closing low. Four days, 600 points and a soft

employment report later, the glass is perhaps half full again.

It's sparked elation -- and concern -- that the market might be poised to return to the froth witnessed in the early part of the year. Two days of 2 billion-plus share volume on the Nasdaq this week, and the second billion-dollar share day on the

New York Stock Exchange since May 2 has renewed hope of a strong summer performance, rather than the lousy churning everyone was looking forward to.

A bullish Friday call by Peter Canelo, U.S. investment strategist at

Morgan Stanley Dean Witter

, who declared that the Fed is likely to stand pat at the June 27-28 meeting, added to the enthusiasm.

So how are strategists responding? By getting cautious, of course.

"We may consolidate, moving slightly lower to sideways, but a lot of pressure is off the market and the pullbacks will not be as severe as they had been," said Steven Goldman, market strategist at

Weeden

. "For the market, one of the drawbacks was the rate backdrop, and now we're seeing this picture emerge and these pressures are coming off the rate backdrop."

For the next few weeks, investors will be looking to various economic data to confirm reports that showed signs of slowing economic activity. The hope for the market is that the

Federal Reserve will find it unnecessary to raise the fed funds rate from its current 6.5% level.

Unfortunately, with the exception of the

Producer Price Index, due out Friday, there aren't many tangible clues on tap next week. The core PPI index, a measure of wholesale inflation, is expected to rise 0.2% in May. In a dead news week, observers believe the market is in for a bit of consolidation as it adjusts to higher closes on the Nasdaq.

It's just as likely, however, that momentum players, many of whom didn't take their ball and go home but waited on the sidelines, will be back, emboldened by Friday's volume and the run-ups in "mo" stocks like

Redback

(RBAK)

(up 42% this week) and

JDS Uniphase

(JDSU)

(up 37%).

Fed Nears an End?

Participants are beginning to believe that the Fed will indeed end its tightening actions in the near future. The July fed funds contract, traded on the

Chicago Board of Trade

, is now pricing in just a 44% chance of a rate hike to 6.75%, compared with fully pricing in that rate hike just two days ago.

There's evidence that people are heeding the mantra to "buy the last hike," judging by the performance of financial stocks in the last week. Financial stocks, sensitive to interest rate moves and that environment overall, have responded positively to downgraded expectations of Fed rate increases.

The

American Stock Exchange Broker/Dealer Index

rose 20% last week; the

Philadelphia Stock Exchange/KBW Bank Index

gained 10.6%.

"They tend to be a pretty good forecaster of Fed policy," said Joseph Keating, chief investment officer for

Kent Funds

in Grand Rapids, Mich. "The folks buying financial stocks are betting we're close to the end of the tightening cycle."

While investors stampeded into highfliers represented in

TheStreet.com New Tech 30

Friday, Keating is more encouraged by the broader advance in stocks. From March 10 to May 31, out of a database of 5,000 stocks, those with P/E ratios of less than 40 and positive earnings, are up 12.5%, while speculative stocks (those with negative earnings) were off 43% in that time frame. Those in the middle, due to a P/E over 40 and positive earnings (like big-cap tech) are off 17.5% in that time frame.

Even if speculative buying asserts itself, it's the broad advance that has Keating heartened, believing it a signal that people recognize that the economic environment, and making money, is going to be more difficult than the past few years.

Turn Up the Volume

Now, the market may be on firmer ground than in the past few weeks, but strategists are reserving optimism unless volume sticks. After a four-day week that included three strong, broad rallies, the only thing that's missing is the volume.

Trading activity increased Friday, indicating that people found a modicum of comfort with the rallies on both the NYSE and the

Nasdaq Stock Market

. Nasdaq volume was 1.87 billion shares, while nearly 1.2 billion traded on the NYSE.

"Not just the Composite, but individual components like

Cisco

(CSCO) - Get Report

and

Sun Microsystems

(SUNW) - Get Report

have broken above their short-term downtrend lines," said Todd Gold, technical strategist at

Gruntal

. "We're cautiously optimistic."

Keating believes the market will need to digest this past week's gains before moving higher. He doesn't believe the valuations reached in early 2000 are justified until mid-2001, when he believes the market is more likely to reach March's levels.

It's a novel concept. Digestion now, rather than indigestion later.