Huntington Beach, Calif. -- The

Alan Greenspan

jawbone is out, and it doesn't feel good.

Rather than use the traditional method of offering arcane hints through various cryptic speeches, Greenspan & Co. took out the big lumber today and fed

The Wall Street Journal

a story indicating that the central bank is concerned about U.S. economic growth. In fact, the

Fed

now says it may need to raise rates to curtail growth before it gets rolling too hard.

It is easy to dismiss Fed warnings airily. The strategy has worked in the past. Greenspan's famous "irrational exuberance" quote led to nothing more than a brief break in the markets in late 1996. Other Fed hints in the past 18 months similarly have had minimal, short-lived impact. But this time the market is taking the Fed hint more seriously.

Essentially, the stock market's high prices have hinged on one factor above all: low long-term interest rates. The benign interest-rate environment led

Warren Buffett

to

declare that he was comfortable with the stock market. With valuations stretched, Buffett and others argue that interest rates need to remain low in order to support the stock market.

With today's action, the key measure of long-term rates, the 30-year Treasury bond yield, shot above 6%. With that measure above 6% it is nigh impossible for stock prices to rattle on, record after record.

More troubling to the stock market is that the Fed's missive comes at the tail end of the corporate earnings reporting season. That means the market will receive little respite from the interest-rate issue for some time going forward.

Could rates come back down? Perhaps. But it would require stark indications that the Fed's grand Asian gamble is starting to pay off. Last fall, the Asian tumble and the concurrent Asian economic and currency crises forced the Fed to stay its hand at a time when many economists anticipated an increase in short-term rates.

But raising rates at that point would've delivered a crushing blow to the already reeling Asian economies. Since then, the Fed has argued that the overseas trouble would inevitably lead to a U.S. slowdown.

The trouble is that the scorching U.S. economy has, thus far, paid little heed to the Asian situation. Corporate profits, while less strong, remain reasonably robust. Real estate prices and housing stats continue to strengthen, and wage pressures show no sign of abating.

The Fed, however, faces the same problem it has for the past two years. The central bank is clearly concerned, but what are its real options? The robust U.S. dollar and the still-weak Asian economies would make an interest-rate hike unpopular overseas. Many of the Asian economies want a very strong U.S. economy that will gobble up goods from abroad, helping recoveries.

Also, the looming

European Monetary Union

is expected to contribute to monetary policy caution as European central banks essentially go on hold ahead of EMU. Lastly, consumer prices remain meek, meaning that inflation has hardly reared its head.

Still, despite all of these cautionary realities, the Fed may make a modest move in order to bring the stock market to heel. Even after Monday's drop, the Dow remains up about 10% for the year.

So what should investors do as the Fed rumbles and pundits debate rates? First, focus on the large amount of downside protection in this market. Corporate share repurchases remain solid, and the IPO calendar has yet to get egregiously heavy. Investors, small and large, still have cash to throw at the stock market.

In favor of diminishing supply is the continued flurry of large mergers. Also in the plus column, corporate profits remain strong and the Asian crisis seems reasonably contained, with many of the region's economies starting to show signs of recovering.

The wild card, of course, remains

Japan

. If the huge Japanese economy falls off the cliff, as a small but vocal group argues is possible, then the U.S. markets will most certainly suffer. But it's much more likely that Japan will continue to bumble along just shy of disaster.

Certainly sharp declines are distasteful, but as

Goldman Sachs

strategist

Abby J. Cohen

has correctly noted, the stock market has moved in a staircase pattern for the past three years. Stocks race ahead and then pause as earnings and interest rates bring valuations back to reasonable levels.

It is likely we are once again on a landing, and stocks will bob around these levels heading toward summer. Such an environment can provide investors with a chance to grab some unexpected bargains.

If rates stick in this modestly higher area, investors may want to focus on steady earners. Stocks like the drug and consumer product companies offer the best refuge in such environments. But their valuations are already stretched. That may lead some investors to hunt for different safety spots.

One area is the major oil companies. The damage of low oil prices is already in these stocks, giving some downside protection. These stocks tend to pay decent dividends, which gives investors a little something extra to hold on to if the market enters a consolidation phase. Also, the tenuous Middle East peace process also offers the possibility that whiffs of crisis could give oil prices, and oil companies, a boost.

Some argue that the Fed, in raising rates, would merely slow -- not halt -- economic growth. That might encourage some investors to seek out otherwise unpopular inflation-sensitive stocks such as gold and copper. Gold prices remain meek, but if inflation hints start to infiltrate the market, this group could benefit.

The real conundrum for investors is technology, which got slammed hard on Monday. Most troubling is the sharp retreat by bellwether

Microsoft

since it reported strong earnings last week. Microsoft's weakness stems from a panoply of concerns, among them worries that the government will take tougher action against the software giant, slowing its growth. Without Microsoft, it's difficult to rally around the battered technology flag.

But some segments remain solid. Demand for computers remains strong, as

Dell

and

Dataquest

surveys show. And networking spending remains robust on a global basis. Capital spending will hold the key for this group. If companies continue to pour money into technology upgrades, as they have the past several years, then the tech group will find its feet once again.

Ultimately, the market's fixation will remain interest rates and the Fed, at least for the next few days. It will be important to see what kind of follow-up commentary the Fed chieftains make in the coming days. If the Fed continues to beat the drum, then the market will have a tough battle ahead of it.

* * * * *

Media Notes:

I'm in southern California for the

Society of American Business Editors and Writers

conference. Mostly a newspaper crowd, many discussions focus on coverage of the markets and investing.

Coincidentally, the hotel hosting the conference does not have

CNBC

or

CNNfn

on its cable system. Go figure...

Some of you may recall when I complained about that

Amigo

car ad campaign. Today

USA Today

reports that the ads are -- surprise -- annoying viewers...

**********

On the Site:

All the markets coverage you could ask for. Where else do you find more than

three

daily

dispatches straight from a trader's desk, let alone

Jim Cramer's

? Plus,

Peter Eavis

and

Erin Arvedlund

tackle the

international

angles. Our markets team, led by

John Edwards III

, produced its typically terrific

view.

Finally, don't let today's market news distract you too much from the action at the

Hambrecht & Quist

conference, with our extensive

coverage led by

Cory Johnson

.