It's been more of a bounce than a rally.

As of the close on June 23, the

Dow Jones Industrial Average

was up 3.2% from the June 13 intraday low. The

S&P 500's

stock index was up 2.1% from its low from the most recent downturn. And the

Nasdaq Composite Index

was up 2.7%. These modest gains have come on relatively low trading volumes: In a rally with some staying power, volume will rise along with prices as climbing prices draw more money in from the sidelines. That hasn't happened so far in this upward move, increasing the odds that it's just a temporary bounce.

Still, even a very modest bounce is better than a continuation of the correction that ruled the equity markets for the last half of May and the first half of June. And some stocks, typically the very ones that took the biggest hits in the May correction, got bigger than index-sized bounces in June.

Australian mining stock

BHP Billiton

(BHP) - Get Report

fell 26% during the correction and then bounced 11%. Coal mining stock

Consol Energy

(CNX) - Get Report

dropped 24% and then bounced 20%. Gold mining stock

Glamis Gold

(GLG) - Get Report

plunged 29% and then bounced 16%.

Sell So You Can Buy Later

If I'm right and this is a bounce and not a rally, you should be selling into it. Not panic selling. Not wholesale selling. There's no need to liquidate your portfolio.

But careful, selective selling would give you some cash for buying at the bottom that's still to come in August or September, I believe, and allow you to reshape your portfolio (see my column

Five Stocks for the Pessimist in You) for the possibility that the

Federal Reserve

and the world's other central bankers will indeed engineer a slowdown in global economic growth in 2007.

It's not surprising that the recent bounce has been so anemic. A round of very well-coordinated and very well-publicized speeches by members of the Federal Reserve from Chairman Ben Bernanke to the governors of the regional reserve banks has put the fear of another round of rate hikes back into the financial markets.

Back on May 10, after the Federal Reserve's Open Market Committee raised short-term interest rates another quarter of a percentage point to 5%, a majority of investors believed in "one and done." Another rate hike at the Federal Reserve's meeting this week -- the announcement will come Thursday -- would be the last before the central bank paused to see how much the economy had slowed under the pressure of previous interest-rate increases.

That was before Fed officials started talking about the need for further vigilance on inflation, how the current inflation rate was outside their comfort zone, about signs that energy costs were finally filtering through into end prices.

Odds, measured by the price of fed funds futures, of an interest-rate increase at the June meeting gradually climbed from 50% at the end of May to 100% today. Odds for another quarter-point increase in interest rates at the Fed's Aug. 8 meeting climbed above 60%. On Friday, the odds of an August hike climbed to 66%, up from 62% the day before.

And, in a sign of just how effectively the Federal Reserve has spooked the financial markets, the odds of a half-percentage-point interest-rate increase on Thursday climbed to 12% on June 23 from just about zero earlier in the month. And rather than "one and done," market sentiment is shifting toward "three and maybe more." The fed funds futures market is now pricing in a 23% chance of a third rate increase -- one more after August -- in 2006.

A 6% Fed Funds Rate

Wall Street investment houses have joined the three-peat party. Barclays Capital, JPMorgan and Credit Suisse all now predict that short-term interest rates will peak at 6% either in late 2006 or early 2007.

This bounce started when the financial markets priced in a 100% chance of a quarter percentage-point interest-rate increase on June 29. With that move priced in, there was no longer any reason to fear the actual event. If the Federal Reserve did raise rates on the 29th, it would be, "Ho, hum. Just what we expected." With the fear of an unexpected move out of the way, equity prices were free to move up from the lows they'd hit when fear dominated investors', traders' and speculators' minds.

If you follow this logic, if the Federal Reserve actually delivers the interest-rate increase that everyone now expects on Thursday, then this bounce lasts only until the stock market starts to focus on the odds of an Aug. 8 rate increase. We've still got a ways to go before the current 66% odds of an August hike become a 100% chance and the market prices in all the risk of the event.

There's some chance that stocks will rally after Thursday if Ben Bernanke and Co. only raise rates by the now-expected quarter of a percentage point. The likelihood is that some time after Thursday, the stock market will start to worry about the prospects for further Fed action and go into a funk again.

That's especially likely because, starting around July 15, stocks enter one of their weakest seasonal periods, as volume starts to dry up for August and fears of September and October, historically unfriendly to stocks, start to weigh on investors.

I think this is the most likely scenario for the next month to three. And I'd like to position myself to avoid the worst of the punishment and to take advantage of the best opportunities if I'm right. Much of successful investing, I'm convinced, is a result of putting yourself -- and your portfolio -- in a position to profit from the most likely turn of events. You want to invest with the wind at your back.

Energy, Metals May Weaken Again

To do that, I think you plan for an August correction that is very similar to the May correction. The driver will be the fear of higher interest rates and the worry that higher rates will take too big a bite out of global economic growth. The stocks that took the biggest punishment in May -- energy, commodity and metals stocks -- could be the biggest victims again. With that in mind, I think you use the current bounce to trim a position or two in these sectors.

Note that the size of the drop suffered by stocks in these sectors in the correction that started on May 10 was remarkably uniform. Not only were BHP Billiton, Consol Energy and Glamis Gold down by 20% to 30%, but

Noble

(NE) - Get Report

,

Nabors Industries

(NBR) - Get Report

and

Ensco International

(ESV)

were down 24%, 25% and 27%, respectively, from May 10 to June 13. In a sharp correction like that one, entire themes tend to sell down in virtual lockstep.

In the bounce, however, performance shows far more variation. Investors tend to sift through the "bargains" when they're buying more carefully than when they're selling on fear. They look for the most attractive stocks: the potential outperformers in the sector that they wanted to buy before the correction (except that they were too expensive) and the momentum leaders in the sector in the rally ended by the correction.

So in the oil and gas drilling and services sector, for example, while Ensco, Nabors and Noble all showed very similar declines (of 27%, 25% and 24%, respectively), the bounces were quite different. Noble bounced back by nearly 12% from June 13 through June 23, Nabors bounced back by nearly 8%, and Ensco International also bounced back -- but only by 4%.

All things being equal, in a group of stocks with about equal downside risk from such macroeconomic factors as interest rates and GDP projections, you'd like to own the stocks with the highest potential upside gains. In other words, if Noble, Nabors and Ensco International all show risk to the downside of 24% to 27%, you'd rather own the stocks with a 3-1 edge on the upside (Noble) or a 2-1 edge on the upside (Nabors) over Ensco.

Not everything is equal, of course. Top-down, big-picture worries are often trumped by company-specific developments. The increasing odds that

General Motors

(GM) - Get Report

and

Delphi

( DPHIQ) will be able to work out a solution to their cost problems without shutting down the auto industry gives a huge boost to

Johnson Controls

(JCI) - Get Report

, which did quite a good job of riding through the correction, thank you.

Sometimes your belief in the long-term direction of the economy and financial markets means you just have to take some short-term pain.

I believe that global inflation is rising. But I don't believe that it is rising as quickly as the official numbers say or the Federal Reserve believes, nor do I believe that modestly higher inflation is more dangerous than modestly lower global growth. So I want to own gold as a bet on higher inflation and, at some point, a weaker dollar. Selling and then rebuying my long-term positions in gold stocks is just too expensive and technically too tricky (for me, at least) to make it worth the effort. Same with my positions in coal and copper. The long-term gain justifies the short-term pain, I believe.

At the time of publication, Jubak owned or controlled shares of the following equities mentioned in this column: Consol Energy, Ensco International, Glamis Gold, Nabors Industries and Noble. He does not own short positions in any stock mentioned in this column.

Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;

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