This market is a killer. One day it's up, and the outlook is so positive. The next day an economic number comes up that is too strong, and the market takes gas. "Good" stocks get beat up, and an occasional Biotech jumps up on a development that is 5 to 10 years from market, if ever. Here we've got a Dow Industrial Average at 10714 only a few hundred points below record levels, and you can believe that the margin calls went out in droves this weekend. It makes you wonder what personal disasters would be in store if the Dow fell 1,000 points.

With that jolly thought in the background, and the recent ugly market action right before our eyes, what's happening and what do we do?

Well, we have a dynamite economy, but we're scared that the Fed will take away the punch-bowl when they meet on August 24. That they will raise rates 1/4 point is widely assumed, and the market is adjusting to that apparent reality. Not many expect a 1/2 point increase, but the fear is that the Fed will change its bias from neutral to tightening of rates. Of course, market lore has it that we should beware of "three steps and a stumble," meaning that if the Fed raises rates three times in a row, the market will fall. When it happened in 1987, it was a disaster. So everyone will be looking for clues as to what action the Fed will take after the 24th.

Of course, with this backdrop of interest rate troubles, we are seeing very choppy markets. In these conditions, you must avoid buying old favorites just because they look cheap. There is a good chance they will get even cheaper. You must limit your investment ideas to those issues you believe have unique positive dynamics moving them, and that you expect will have positive surprises in the immediate future. If you don't have confidence in any stocks, don't worry about it. There's nothing wrong with selling some of your stocks that either have underperformed and have no special prospects, or those that have gone up to the point you think the valuation is too rich. If you hate to sell all your position in such stocks, then consider selling one-half.

Looking into the future is a tough proposition, beyond the first five minutes. When in doubt accumulate cash. All is not lost, as the economy could unexpectedly soften over the coming months, negating the probability of a third interest rate hike. But until the interest rate situation is clarified, be more on the sidelines than usual, as the playing field could get bloody, and when the blood is yours, it takes the fun out of investing. Yes boys and girls, it's that time again - CASH IS KING! Stay tuned.

The Market Pro - August 8, 1999