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Just Breathe Deeply

Both this week's dive in Net stocks and the continued rate hike chatter are scary. But the fundamental strength of the economy remains intact.

Oh, the gloom and doomers are having a great time. Net stocks reeling. Other tech stocks ailing. Bears atwitter with talk of a rate hike coming soon.

Adding to the mounting worry: Each attempt at a rally in the past several days has run into a wall of selling pressure. Even Thursday's rebound didn't feel good, despite sticking to the positive side. Eager bulls looking for a bounce on the dip are getting their fingers singed on a regular basis.

So is this the end? Or is this another cathartic chapter in this aged bull market? Those who like to hum

Jim Morrison

tunes contend that the Net stocks never traded on more than air, and that air is heading out the door. They also argue that infatuations with tech stocks left earth's orbit long ago. The pain, in the collective mind of this crowd, is just beginning.

But as the nerves crackle, it's a good time to take a step back and see if the world has come undone around us. We should all be taking a little time and a little realism to gauge the scene.

First the macro picture. Yes, it has gotten nastier in the past several months. Interest rates are rising, fears of more


action are prevalent. The ballyhooed Goldilocks economy -- not too hot, not too cold -- is showing more fray than at any time since the


crossed 4000 back in 1995. It

looks too hot. And it feels too hot. Last week I was in Cedar Rapids, Iowa. In a section on the southern end of town, where all the motels and fast-food joints are, the signs on the hotels screamed about the need for workers. Starting wages around $7 an hour. Every hotel room stuffed. This, by the way, in the heart of Iowa where the farm economy is facing its worst crisis since the Depression. In the past, weaknesses, geographically or by industry, have helped act as a safety valve on the economy's growth. We're clearly seeing less of that now.

Still, the fundamental strength of the economy remains intact. Inflation, while a worry, is not going gangbusters. Interest rates, while nudging higher, are not taking off. And companies, especially in the technology sector, continue to turn in strong performances on a quarterly basis.

What the recent downturn has done, ideally, is put a good amount of fear into the marketplace. The IPO calendar remains stuffed with questionable companies, and it's good for the market to start spitting out some of these offerings. For instance, the

poor showing of the

offering is a good indication that some discipline is returning to the market.

Essentially, the stock market was in sore need of a shellacking. Things can't go up forever, and, at times, stocks need to head sharply lower in order to wash out some of the pretenders. We've seen some of that in the past few days, and we're likely to see some more of that. It's not a bad thing. The key is to keep a steady head.

Late Thursday we saw some selective hunting, primarily in higher-profile names.









bounced off lows. But the picture remains hazy. Most significantly,



performed poorly on Thursday, though it is near its 52-week high. There's still no shortage of late-summer fear in the air.

In the days ahead, investors should watch carefully for inflection points. Are the generals -- Intel,



, Cisco,



-- showing signs of life? Are institutions starting to step in and make bolder bets? Check those trade-size volumes. At this point, institutions have made few bold moves.

And finally, there's no need to be a hero. Don't step in and try and save a stock or the market. Let this move take its course and keep a close eye out for a turn. The American economy hasn't died, nor has American business. We're just getting a nice summer pasting that refreshes the notion that markets do indeed fluctuate.


Feeling anxious? Check out the

trading diaries on

. Some interesting tales from those in the trenches.