Crosscurrents Confound Bottom Watchers

A fragile market is looking in every possible direction nearing Thursday's economic reports.
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SAN FRANCISCO -- When Wednesday's trading got under way, everyone, it seemed, was talking optimistically (again) about the bottom.

From

TSC's

Jim Cramer to

Arnhold and S. Bleichroeder's

(and sometimes

TSC's

) John Roque, to

Merrill Lynch's

Richard McCabe, among others, market players' focus was returning to whether the

Nasdaq Comp

had put the worst days in its rearview mirror.

Tuesday's 6.5% gain by the Comp, "accompanied by a respectable 2-to-1 advance-decline ratio, appears to be part of a near-term bottoming pattern" for the index, McCabe wrote this morning.

"Several things are conspiring here to say that it is likely the Nasdaq extends

Tuesday's gains," Roque wrote in a similar missive to his firm's clients.

The problem, apparently, was that everybody else was starting to focus on the economic data due Thursday, specifically the first-quarter

employment cost index

and

gross domestic product

reports.

Remember when stocks -- especially tech stocks -- cared nary a whit about economic reports? When investors treated them as nothing more than arcane relics of some bygone era? In fact, they treated them as something

less

than that -- something approaching disdain. Well, those days are long gone my friends.

Given that bell-bottoms, platform shoes and

John Travolta

all have had their time in the retro-chic sun, it shouldn't be surprising Wall Street is turning back to past fashions.

"Each and every time they kick off the interest-rate talking cycle, the market gets hit," says Sam Ginzburg, senior managing director of equity trading at

Gruntal

. Thursday, "the interest-rate talk begins in earnest."

I spoke with Ginzburg at midday when the

Nasdaq

had begun to play catch-up with the

Dow's

earlier struggles. The trader wasn't buying the "bottom" story, suggesting he'd "much rather be on the short side of the Nasdaq stocks than the long side."

Part of that outlook was based on a belief that the recovery from the April 14 lows has been OK, but a lot of stocks were making "lower highs," a technical pattern suggesting more weakness to come. The other big factor being that the "big numbers" are heading to a stock market near you ... soon!

When we spoke, the action was pretty subdued (beyond the

Marimbas

(MRBA)

and

F5 Networks

(FFIV) - Get Report

, that is). But trading activity accelerated on the downside during the afternoon as, once more, market players turned their focus ahead to the economic data.

Once as high as 3777.08, the Nasdaq closed down 81, or 2.2%, to 3630. The Dow shed 1.6% while the

S&P 500

lost 1.1%. Still, trading volumes were relatively light on both the Big Board and over-the-counter markets, suggesting there was a lot of position squaring ahead of the data, rather than any overwhelming sense of gloom.

The consensus estimate for the ECI report is 0.9%, vs. 1.1% in the fourth quarter. GDP is expected to come in at 5.9%, vs. 7.3% in the final stanza of 1999.

Data in line with the expectations "will clearly not be comforting to the

Federal Reserve

," according to Ken Mayland, president of

ClearView Economics

in Pepper Pike, Ohio. "I don't see how the market can take any comfort" in them.

An ECI at 0.9% would indicate a year-over-year increase for the indicator closely followed by

Alan Greenspan

, Mayland noted. And while GDP at 5.9% or even 6% is an improvement (from the Fed's perspective) over the fourth-quarter blockbuster, it's far below the central bank's target level of around 3%.

Additionally, because of recently higher oil prices and the annual adjustment payment to government workers, the economist sees potential for upside risk to the price-deflator component of the GDP report. He wouldn't be surprised if it were 3% or higher, which "would have a lot of shock value." The consensus estimate is 2.2%.

The alternative scenario, of course, is the numbers are benign, the inflation hounds are sent scurrying and stocks resume the upward path.

"People were selling a little big today to get flat in case there's a disaster," said Bob Basel, director of listed trading at

Salomon Smith Barney

. "But if the numbers are favorable, who's to say where the limit is on the upside?"

The possibility for such wildly divergent outcomes says much about the fragility of the market and why -- unless it's how you make your living -- there's no sin in sitting out the action until the market provides a clearer indication.

Just sticking to your long-term plan is also an option. Boring, but effective.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com .