The bitter pill of a

Federal Reserve

apparently still hellbent on raising interest rates offset a sharp decline in oil prices, positive economic data and more M&A activity this week, keeping major averages off balance.

For the week, the

Dow Jones Industrial Average

rose fractionally while the

S&P 500

and the

Nasdaq Composite

each gained 0.2%. Equity upside was severely limited by Thursday's selloff, which followed the FOMC policy announcement.

The Fed delivered it's ninth rate hike in a row, which was no surprise. But the central bank didn't signal it would lift its foot off the monetary brake anytime soon, dashing the hopes of many bullish players, some of whom had even started discounting an end of rate hikes altogether. No such luck: Inflation pressures "remain elevated," the Fed warned.

"We believe investors should continue to tread carefully in the second half of 2005," wrote Thomas McManus, an equity portfolio strategist at Bank of America. "Earnings disappointments are becoming more prevalent, and the Federal Reserve appears likely to push interest rates higher and longer than current market consensus expectations."

As the second-quarter came to a close this week,


(ORCL) - Get Report

posted better-than-expected results, but high-profile profit warnings or disappointing guidance were issued by companies such as

Cardinal Health

(CAH) - Get Report


General Mills







( PIXR).

Other major corporate events this week included

Bank of America's

(BAC) - Get Report

$35 billion merger agreement with MBNA

( KRB);


(BA) - Get Report

hiring of


(MMM) - Get Report

CEO James McNerney; and the (triumphant) return of John Mack as CEO of

Morgan Stanley

( MWD).

Oil Cools But Dorsey Stays Hot

With oil below $60 and stocks holding steady at midweek, it seemed that the predictions of market guru Woody Dorsey may not hold true. But by Friday, the founder of Castleton, Vt.-based Market Semiotics, was fully vindicated.

Two weeks ago, Dorsey

predicted that oil would hit $60 per barrel. He also predicted that the psychological level would spook investors, who would turn around and send stock proxies to intermediate lows by mid-July. Along the way, inflation jitters would be revived and add to the selling pressure.

As if according to Dorsey's plan, a correction in oil earlier this week was followed by a strong bounce on Friday. Crude oil for August delivery rose $2.25 to $58.75 a barrel on Nymex.

"Seeing that

crude oil is rallying again strongly, it shows that it's still in that strong phase," Dorsey says. "We've had a normal correction, but nothing suggests it's more significant. We can retest the highs and even make new highs over the next couple of weeks."

As oil bounced Friday, stocks were unable to benefit from stronger-than-expected reports on consumer confidence and manufacturing activity. The Dow ended up just 0.2% at 10,296.76, the S&P 500 added 0.2% to 1193.35, while the Nasdaq dipped 0.1% to 2054.73.

Predictably, trading activity was sparse Friday ahead of the July Fourth holiday weekend. Furthermore, the bullish economic indications only set the stage for rising inflation jitters and more Fed rate hikes, a theme that will likely find more fodder next week in the run-up to the key employment report for June, Dorsey believes.

On Friday, the bond market began unwinding some of the most unrealistic bets regarding a shift in monetary policy. The benchmark 10-year bond sold off, losing 1 1/32 while its yield rose to 4.04%.

For next week, Dorsey "wouldn't be surprised to see the market undercut this week's lows," although there will be some short-covering as market participants keep a short-term point of view.

"There are a lot of crosscurrents in this market that don't necessarily add up, but generally the pressure is still on the equity market over the next couple of weeks, although we can have a couple of one-day wonders," Dorsey says.

Over the next week, that trend will come as equity investors unwind their expectations that the Fed would pause or stop raising rates. "Up until this week, people were saying that the Fed is just about over," he says. "But now sentiment is shifting towards the belief that it needs to keep going. The stock market hasn't discounted that yet."

On another note, Dorsey agrees with Jim Rogers -- founder of the $1.5 billion Rogers International Commodities Index Fund -- that commodities and even alternative energy are a good long-term play. "Some people think that commodities moving higher is just a flash in the pan," Dorsey says. "I'm saying it's a much bigger move, it's a cultural change. We can see that in people's perceptions towards alternative energy and hybrid cars, for instance. Ten years ago, it used to be those things were just groovy, but now people are realizing that energy crises will be very persistent."

On Tuesday, the U.S. Senate passed the latest energy bill which, besides providing incentives to boost domestic production, also seeks to double the use of corn-blended ethanol in the economy by 2012.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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