Blub, blub, blub.

That sinking sound was the market's attempt to get its head above water Friday, failing as most shares resumed their plunge down to Davey Jones' locker. With yet another afternoon selloff, stocks failed to keep a midweek rally alive but managed (barely) to post their first positive week of the year.

For the week, the

S&P 500

added about 3 points, or 0.3%, to 1171.25 and the

Nasdaq Composite

gained 1 point to 2035.61. The

Dow Jones Industrial Average

gained 33 points, or 0.3%, to 10,426.32. But any excitement about the weekly results was dampened by Friday's desultory slide, which saw the Dow fall 0.4%, the S&P lose 0.3% and the Comp shed 0.6%.

This was the busiest week for fourth-quarter earnings reports of the season, and there was plenty of disappointment to go around. Biotech, telecommunications and financials helped drag the markets lower. Even mighty

Microsoft

(MSFT) - Get Report

, which reported better-than-expected profits and raised 2005 guidance, could manage to gain only 7 cents Friday after its announcement. For the week, Microsoft gained 2%.

A series of M&A announcements culminating in

Procter & Gamble's

(PG) - Get Report

$57 billion offer for

Gillette

(G) - Get Report

did little to turn things around. P&G lost 3% for the week and Gillette gained 17%.

All three major indices posted gains Tuesday and Wednesday, with only the Dow missing out on a third modest day in the green on Thursday. Boding poorly for those hoping for a longer-term rally, volume slipped as the week wore on, breadth turned increasingly negative on both the Nasdaq and

NYSE

and the Chicago Board Options Exchange's Volatility Index fell for four straight days, a signal that typically reflects growing complacency -- not a market bottom.

Economic news was mixed. Bonds tanked on higher-than-expected consumer confidence and durable goods orders (excluding aircraft orders) earlier in the week, but took off on Friday's weaker-than-expected fourth-quarter gross domestic product report.

Thanks to what will surely be a record trade deficit, the economy expanded at an annualized rate of 3.1% after inflation in the quarter, a full point less than the previous quarter and about a half-point below the consensus forecast. The yield on the Treasury's 10-year note ended around 4.14%, right where it stood a week earlier.

No Soft Landing in China

Hidden beneath the swirling eddies of the drowning stock market, China's GDP report, which came out on Monday, may ultimately say just as much about the future direction of the markets.

Since last spring, Chinese authorities have claimed that they wanted to slow the emerging giant's economy to prevent it from overheating and crashing. But the measures they enacted, including a modest October interest rate hike and so-called administrative measures to discourage lending for construction, have had little effect.

Growth for the fourth quarter was at annualized rate of 9.5%, and growth for the full year was the same 9.5%, the fastest rate since 1996. Consumer prices for the year rose 3.9%, far faster than 2003, but down from the peak annualized rates of over 5% in the summer. Exports hit a record $64 billion in December.

"China's attempt to slow growth at the end of 2004 was anything but effective," Jay Bryson and the Wachovia economics team wrote in their weekly wrap-up on Friday. With the Olympics coming to Beijing in three years, construction spending may actually accelerate, they added. "This should continue to engender further tightness in commodity markets."

"The basic point on China's soft landing is that it really isn't that soft after all," Morgan Stanley economist Stephen Roach chimed in. "If the economy has "landed" with industrial output growth still cruising in the 14.4% zone, China's impact on the rest of the world is still likely to remain very strong."

Chinese authorities were left to argue that growth would have been totally out of control absent their administrative measures. "We would be facing serious inflation now," Li Deshui, a member of the central bank's monetary policy committee, said, according to

Bloomberg

.

The consensus view among Western analysts was that China's fourth-quarter growth would slow to a rate below 9%. The consensus view also holds that the Chinese are in the midst of a successful "soft landing."

In part, China's domestic braking measures are being overwhelmed by the powerful U.S. economy. Because China relies heavily on exports to the U.S. and pegs its currency to the dollar, the country's central bankers have lost some of their ability to influence activity. In a truly free currency market, the huge flow of dollars into China would cause the yuan to appreciate. But with the peg and the Chinese proclivity to wash its dollar surplus back into U.S. Treasury bonds, the yuan stays put and economic activity continues to race higher.

Currency markets have been debating whether China would relax its dollar peg for months and the likelihood doesn't look much better now than it did in

October. A weaker tie to the dollar would immediately send the yuan upward dragging other Asian currencies along for the ride.

Midweek, a Chinese government official was quoted somewhat out of context by news wires predicting "now is the time" for a change in currency policy. The comments were quickly disavowed,

Mission Impossible

-style, by other officials.

If the Goldilocks consensus is wrong on China, one of two outcomes is likely: Either the country overheats and collapses, sending commodity prices tumbling, or continues to grow faster than expected for another year, sending commodity prices much higher. Morgan Stanley's Roach says "the jury is still out" on how China will fare, especially if the U.S. economy slows, as he expects.

Aside from confusion about playing the

iShares China ETF

(FXI) - Get Report

, the divergent scenarios also make it hard for investors to know which way to go on core materials producers like

Dow Chemical

(DOW) - Get Report

,

Phelps Dodge

(PD) - Get Report

or

Nucor Steel

(NUE) - Get Report

. For the week, Dow gained 1%, Nucor gained over 6%, partly on its own strong earnings report, and Phelps lost 3% as it lowered first-quarter guidance.

Still, for the full year, Phelps officials see strong demand and sound confident there's no China meltdown in sight. "Importantly, the market outlook for our major products remains quite positive," CEO Steven Whisler said.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.