The markets were listless this week, as traders were eager to grab onto anything that smacked of a theme. Next week, it should be easier to find a theme as the

Federal Reserve

Chairman Ben Bernanke gives his semiannual testimony to Congress Wednesday and Thursday.

"Anything that was anything got magnified" this week, says James Paulsen, chief investment strategist at Wells Capital Management. Paulsen was referring to the subprime mortgage market's issues highlighted by

HSBC Holdings

(HBC)

on Thursday, and a few hawkish

Fed

speakers Friday.

Paulsen also noted a slight shift in sentiment this week, as traders backed away from the frothy enthusiasm that the economy is rolling along like a freight train without any obstacles.

Indeed, Treasury yields came back down this week, reflecting traders' reassessment of the economic outlook. "I can see the bearishness creeping up again," says Paulsen. The 10-year yielded ended the week at 4.78% after finishing up last week at 4.83%.

Ultimately, Friday's hawkish Fedspeak and another bad day for the semiconductor sector led the major averages to losses for the week.

Weakness in the

Nasdaq Composite

Friday was sparked by

Micron Technologies'

(MU) - Get Micron Technology, Inc. (MU) Report

warning that memory-chip prices will fall 30% to 40% this quarter. The Nasdaq Composite slid 1.16% Friday, and lost 0.6% on the week. Micron slipped 2.6% Friday.

Other chip names down in sympathy included

SanDisk

(SNDK)

and

KLA-Tencor

(KLAC) - Get KLA Corporation (KLAC) Report

, while

Silicon Image

(SIMG)

tumbled 24% after issuing disappointing results and guidance.

The Philadelphia Semiconductor Sector Index slid 1.3% Friday and was down 0.7% on the week. The

Semiconductor HOLDRs

(SMH) - Get VanEck Vectors Semiconductor ETF Report

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exchange-traded fund fell 1.25% Friday and 1.1% on the week.

As embodied by the chips, the tech sector was choppy this week, but the last word was a negative one. On Wednesday, traders celebrated the sector as

Cisco Systems

(CSCO) - Get Cisco Systems, Inc. Report

reported strong earnings and provided better-than-expected guidance. Cisco ended the week up only 2.1% after being up more than 6% for the week intraday Thursday. Meanwhile,

Microsoft

(MSFT) - Get Microsoft Corporation (MSFT) Report

shed 4% this week, weighing on all major averages.

The

Dow Jones Industrial Average

finished down 0.5% Friday and 0.6% lower on the week, while the

S&P 500

slid 0.7% Friday and 0.6% on the week.

After hitting a new record high last week, the Dow Jones Transportation Average fell 1.7% in the week, as worries about the economy and the housing market ballooned. The homebuilders slid after

Toll Brothers

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announced a 19% drop in revenue and cancellation rates still up around 30%. Toll Brothers fell 3.1% Friday and 8.5% on the week. The Philadelphia Housing Sector Index fell 4.4% on the week.

Friday's roster of Fed speakers didn't mention any threats to economic growth. Rather they focused on inflation.

Treasury traders like to pigeonhole Fed officials as doves or hawks, but the message from the Fed these days is unanimously hawkish.

The singularity of voice from the Fed on Friday is also a harbinger of the tone Bernanke likely will take next week to Congress. He's not going to go neutral. He's going to be hawkish on inflation, even as he acknowledges the strong economic growth that ushered in the new year.

"It's not quite a victory dance, but he'll be right in repeating that the Fed was and remains confident that the economy is not in grave jeopardy," says Stuart Hoffman, chief economist at PNC Financial Services Group. "He'll also repeat the near-unanimous statement that inflation is running higher than they'd like and that risks to inflation are to the upside."

First out of the gate was St. Louis Fed President William Poole, who said in a speech there to the AAIM Management Association that "if core inflation seems to be settling at a rate above 2%, then such an outcome would be unacceptable to me." He added that economic growth has been strong, and that "if we get an upside surprise on gross domestic product growth, then monetary policy may have to be tightened somewhat."

Dallas Fed President Richard Fisher agreed that Fed rate hikes still may be needed. "Indeed, if increases are needed, I would aggressively advocate for them," said Fisher in a speech in Dallas to the Park Cities Rotary Club. He said he would not rule out further increases in rates "if inflationary winds gain the upper hand."

Lastly, Cleveland Fed President Sandra Pianalto, in a speech to the Southwest Florida Speakers Assembly, said that as energy, commodity and housing prices normalize, the Fed can get a better picture of the true underlying inflation situation. But she added that "we may see that some inflation risks remain."

About rates, she said, "In that case, some additional policy firming may be needed."

Treasury traders' nerves also were frayed Friday by yet another Fed official's resignation announcement. Susan Bies announced she will retire from the Federal Reserve Board of Governors as of March 30. While Bies was not a typical market-mover, her resignation is just the

latest in a string of resignations by top level Fed officials.

So, traders go into next week worried about the Fed, and the concern is keeping a cap on the stock market's Goldilocks rally for the time being.

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

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