Some days I envy the bettors at the racetrack. To collect, all they have to do is figure out which horses will win, place and show.

At least they don't have to understand the psychology of the jockeys and the horses.

But that, in effect, is what confronts investors as we head into

Federal Reserve week. First, investors have to figure out what the members of the Open Market Committee think about the economy. Do they believe it's slowing and needs only a gentle, 25-basis-point hike in interest rates to stave off inflation? Do they believe that inflation is poised to roar back, so that the economy needs the stiff belt of a 50-basis-point increase? Are they even more pessimistic -- so much so that they'll raise rates by 50 basis points in May and slap the economy with another 25 when the they meet again on June 27?

Second, investors have to figure out how the market will react to the Federal Reserve's move. Is the market so depressed at the moment that it will just sink further into a funk if the Federal Reserve announces a 50-basis-point shot to the solar plexus? Or is the market so worried about what

Alan Greenspan and company will do that any concrete number -- 25 basis points, 50 basis points, whatever -- will seem like a relief?

Some Spell Relief W-A-I-T

Sure is tempting to just throw up my hands and wait. That, after all, is pretty much what most investors have done this week, judging by market trading volume, which has slowed from moderate to downright sluggish. I understand the impulse to do nothing. With the Federal Reserve meeting on the 16th -- the same day the government is due to release the April

Consumer Price Index and numbers on last month's

housing starts, two key indicators of inflation and economic activity -- why do anything that might turn out to be a mistake in a couple of days?

But the market also told us this week that the Federal Reserve is currently the only game in town. When the biggest technology conference of the year -- the

Chase H&Q

meeting in San Francisco -- doesn't move technology stocks at all, you know that "it's the Federal Reserve, stupid!" And if the central bankers' moves are that important, I'd sure like to understand what those moves might be and how they might affect my portfolio. Besides, there's a good chance that the market's reaction to the Federal Reserve will produce a significant relief rally, one that might be a really good selling opportunity if you believe, as I do, that this downturn in technology stocks hasn't yet run its course.

I don't think it's possible to figure out the collective brain of the Federal Reserve's Open Market Committee, the group that makes decisions on short-term interest rates, with any certainty. We don't know exactly what variables the panel studies, and we know even less about how they weight the variables they look at. I think the best an investor can do is try to handicap the possible outcomes of the meeting and their likely effect on the market. In this case, the strongly pessimistic consensus that has developed in the market over the last week makes the exercise easier than usual.

In the last two or three weeks, the consensus among economists on Wall Street, and the institutional investors they advise, has shifted significantly. At the beginning of the period, I'd say that about two-thirds of the group believed that the Fed would raise rates by 25 basis points next week. The remainder was divided between a group that forecast a 50-basis-point hike and a very small minority that thought the Fed might do nothing. That last group has now pretty much disappeared, and I'd say the 50-basis-point faction has moved into a two-thirds majority.

Economy Keeps Growing and Growing

Some pretty convincing evidence in the last couple of weeks has pushed the consensus in that direction. The economy, as measured by the

gross domestic product, continued to roar ahead in the first quarter at a rate of 5.4%, well above the rate at which the Federal Reserve believes that growth inevitably causes inflation. Wages and salaries climbed by 1.1% in the quarter, a small but potentially significant acceleration from the 0.9% increase in the previous quarter. The Fed's

Beige Book, an anecdotal account of business conditions across the country, noted substantial increases in wage pressures.

And very preliminary government numbers also suggested a decline in the rate of productivity growth. Despite the difficulty in drawing a meaningful trend from that productivity data, the Fed is likely to take the numbers seriously, since declining productivity growth makes it virtually impossible for a U.S. economy growing at better than 5% to avoid inflation.

Looking at that data, I too am convinced that the Fed is likely to raise rates by 50 basis points on May 16.

Are the odds 100%? Nope. The Fed certainly doesn't want to crash this economy, and the bankers may be seeing signs in their data that the economy is already slowing enough that they don't need to raise so vigorously.

For Most Alternatives, the Same Result

Could be. But to a market handicapper, some of the possible alternatives aren't really significantly different in their results.

For example, what happens if the Federal Reserve doesn't raise rates at all? We'll get a tremendous relief rally that might run for days or even weeks. And then investors will start to fret even more intensely about the likelihood of action on rates at the June Fed meeting. Since it didn't move in May, investors will worry, the Fed will have to move -- and move big -- in June.

If the Federal Reserve increases short-term interest rates by 25 basis points? Same relief rally, I believe. Same return of fear as we get close to the June 27 meeting.

What about a 50-basis-point move? The reaction is likely to depend on what "bias" the bankers announce for the future. The Federal Reserve could indicate that the May increase is the last for a while because they think the economy is likely to slow enough as a result of the interest-rate increases already in place. Result? Relief rally, clear and simple, and then, as the June meeting comes and goes without action, a continued rally as it becomes clear the Federal Reserve meant what it said.

If, on the other hand, the Federal Reserve slaps on 50 basis points and indicates that it is biased toward continued moves to raise rates, then

maybe

a temporary relief rally, but likely a brief one at best, because the market will almost immediately begin to focus on the June meeting.

Drastic Option

And finally, what happens if the Federal Reserve hikes rates 75 basis points? Fasten your seatbelt, because it will be a very scary ride. The market isn't expecting this kind of punishment. And by moving so strongly, Alan Greenspan would be signaling that inflation is even more dangerous than investors think. That would knock the stuffing out of the market.

Fortunately, I think a 75-basis-point hike is extremely unlikely. The Fed doesn't want to overshoot and turn the economy stone cold. Neither does the Fed want to create a financial crisis that would require it to provide liquidity to the markets, since that would undo any braking effects of this series of interest-rate increases.

Unfortunately, I think it's also unlikely that the Federal Reserve will announce on May 16 that the battle against inflation is over. In fact, the numbers have worsened recently, and the economy shows no signs of slowing. And this Fed chairman believes in delivering a reasonably consistent message, so it's unlikely now that Greenspan will put his inflation-fighting tools in the closet, knowing that he might need them again as soon as June 27. I don't think we'll get a sustainable rally until the Fed is done -- and I just don't think they're done yet.

All the other scenarios but one boil down to variations on a theme. After the Fed moves, we'll have a relief rally of some relatively short duration. Then the rally will stall as the market refocuses on the Fed's June 27 meeting.

Strategies for Success

So what do you do with this insight?

If you're a long-term investor, I believe you should ignore the whole thing and enjoy the summer sunshine. I think we're closer to the end than to the beginning of this bear market in technology stocks, and if you've held fast so far, there's no need to do anything now. Unless the Fed surprises us with a huge 75-basis-point rate hike, I don't think stocks are going a whole lot lower than the levels they hit on April 14 and this week.

If you're an investor with a technology-heavy portfolio, but you like what you own and you've raised some cash, I think you also do nothing. You've positioned yourself to ride out this market and to take advantage of the turn when it comes, so you don't need to move now.

If you're an investor who had the skill or luck to move to cash early and have been sitting safely on the sidelines while the rest of us have been sweating it out, I'd also suggest that you do nothing. The relief rally will be succeeded by more worry and volatility. I think it's too early to buy. At least wait for the return of fear as the June meeting approaches before making a major commitment. Nibble if you must, but it's not time to bite yet.

If you're a trader -- well, you can try to time the despair/relief cycle. A big bet on Monday if the market continues to sink -- with a hope that the market will rally strongly after the Fed meeting -- would be a way to try to profit from the cycle. But it's very risky here. No more than a handful of stocks have built reliable trading ranges. (See my column from April 28,

Target Practice for Hitting Stock Bull's Eyes, for some examples.) So far, most of those ranges have held, but they're under pressure. And many other stocks dropped to new lows this week. This isn't a market that's likely to prove very rewarding for any except the most experienced traders.

Finally, if, like me with Jubak's Picks, you're still trying to reposition a portfolio by selling off your weakest stocks and raising some cash, a post-Federal Reserve relief rally is an opportunity that shouldn't be missed. The window may be open for only a short time and the rally may not be huge, but it's still a good selling opportunity in a market that hasn't offered many. Be prepared.

And don't get too carried away by any relief rally yourself. I don't think that whatever the Fed does on Tuesday is going to turn this market around overnight.

Jim Jubak is senior markets editor for MSN MoneyCentral. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. He welcomes your feedback at

mctsc@microsoft.com.

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