The second half of 2006 is starting out with a healthy dose of uncertainty as the stock market's mini-correction from mid-May to mid-June keeps coming back to haunt investors. Fears of global central bank tightening, high oil prices and a weak dollar (to name a few) are still here, and they have intensified.

Monday's market was a perfect example of this general lean to the downside, as early gains evaporated, particularly among tech stocks.

While earnings season, which kicked off Monday, is expected to log another quarter of double-digit profit growth, the markets remained spooked by warnings from 3M ( MMM) and AMD ( AMD) last week and EMC ( EMC) on Monday.

After trading as high as 11,174.47 intraday, the Dow Jones Industrial Average closed up 0.1% to 11,103.55, while the S&P 500 added 0.15% to 1267.34. The Nasdaq fell 0.62% to 2116.93, after trading as high as 2,142.36.

After the close, Alcoa ( AA) kicked off the official earnings season by reporting a 62% increase in net profit at 85 cents per share. Revenue rose to $7.96 billion but missed analyst expectations for $8.02 billion. Alcoa's shares closed Monday down 0.42%, and were recently down 3.31% in after-hours trading.

In typical fashion for this market, Monday's weakest stocks were in the technology sector. EMC fell nearly 7, while chipmakers were notably weak as well: AMD, Marvell ( MRVL), and Intel ( INTC) fell 4.46%, 5.70% and 2.05%, respectively.

It was the more defensive sectors that outperformed Monday, highlighting strategist recommendations that investors take a less-aggressive posture. Consumer staples giant Procter & Gamble ( PG) gained 0.85% , Coca-Cola Enterprises ( CCE) gained 0.93% and Kellogg ( K) was up 1.93%.

Cloudy Situation

With the shortened holiday trading week over, analysts and strategists have weighed in on the second half, and the outlook is anything but simple.

Anxious investors are trying to shake off the stock-market selloff that began two months ago, but it won't seem to go away. Following a correction in emerging markets and commodities, major U.S. averages hit their bottom for the year on June 13 at about 10,706 for the Dow, 1224 for the S&P and 2072.50 for the Comp.

But market watchers are growing increasingly concerned those levels won't hold as a long-term bottom. Many strategists predict a "real" correction of 15% to 20% to take hold this fall.

Given that outlook, cash isn't such a bad option these days, says Jeffrey Saut, chief investment strategist at Raymond James & Associates. A retest of June's lows is in order, writes Saut, who has been "husbanding cash all year, including even selling partial positions in our beloved 'stuff stocks.' "

Saut has maintained that energy and commodity stocks are good long-term investments, but wrote Monday that "even here the near-term situation is clouded."

Cloudy is the right term for strategists' and analysts' expectations for energy prices and related stocks. While there is no arguing with the demand created by industrial build-outs in the developing world, analysts aren't sure the impact that a global economic slowdown will have on these commodities, which have led the market thus far this year.

Notoriously bullish Ed Keon, chief investment strategist at Prudential Equity Group, writes that despite his expectations for strong second- and third-quarter earnings growth overall, "there will be some turnover in these energy and materials sectors in the second half" as the economy slows.

Caution is warranted, as it may be commodities, energy and materials stocks that lead the market into a correction. But they will emerge out the other side to lead a rally, says Mary Ann Bartels, chief markets analyst at Merrill Lynch. She maintains that a correction in commodities and related stocks is a "retracement of the up leg since 2002 and this correction will position the market for a fourth-quarter rally into 2007."

Bartels targets crude oil at $85 per barrel. Oil closed Monday at $73.45 per barrel, down 0.22% from Friday.

Fed Stopwatch Still Ticking

Most watchers of the market can't help but note there is no resolution yet to the Fed's monetary tightening cycle, but warn that an end to rate hikes does not mean a rally for stocks. After 425 basis points of fed funds rate hikes, investors are no surer the end is in sight than they were a year ago, so fears are only stronger that the Fed will go too far. Complicating the scene are rate hikes expected by the European Central Bank and the Bank of Japan, which will slow global economic growth as well.

"There has been some positive bias for financial stocks and health care names once the Fed was done, but the historic analysis does not provide any real investment clarity," writes Tobias Levkovich, chief U.S. market strategist at Citigroup.

After the tightening cycle that ended in July 1984, the S&P 500 returned 9.75% in the following three months. But after September 1987's final fed funds rate hike, the same index lost 25.76%. After the February 1995 rate hike, the S&P 500 gained 7.19%, but only 1.53% after May 2000's final rate hike.

The Fed is unlikely to halt its rate-hiking cycle at this point, however, as inflation continues to rise. Friday's weak jobs report contained the highest increase in wages in five years, and the Fed didn't likely miss that part of the report. The slowing economy is to be expected, and so is the Fed's tightening into the wind, says Richard Bernstein, chief investment strategist at Merrill Lynch.

"Wouldn't it be ironic, if this turned out to be a perfectly normal global economic cycle?" writes Bernstein, who Monday moved the consumer staples to overweight in his model portfolio and technology to underweight.

While there really is no such thing as "normal," being long staples and underweight (or short) tech is shaping up as the place to be this summer.
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 here to send her an email.

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