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THE DAY AHEAD: Recent swoon will soon be distant memory

Rather than focus on one particular company or sector, it's time to take a closer look at the overall market dynamics that have made Wall Street more unpredictable than a roulette wheel in the past two weeks.

Despite what the so-called market pundits say, the recent drop in technology stocks, particularly Internet issues, is more related to the whims of the Federal Reserve Board than the performance of any specific stock.



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In fact, it might be more accurate to say the market is trading on the perceptions and interpretations of what Chairman Alan Greenspan says rather than what he actually says or does.

Just six short trading days ago, the Dow and Nasdaq were both perched at all-time highs.

But during the first leg of his Humphrey-Hawkins testimony before Congress last week, Greenspan couched his statements in typically vague terms while managing to imply the Fed wouldn't hesitate to raise short-term interest rates again.

Well, that's all Internet investors needed to hear.

When you're investing in companies that consider losing only $24 million in a quarter a great success, any sign of a possible upward change in interest rates is all any self-respecting Internet investor needs to unload the stocks in a hurry.

Longterm investors, who incidentally make up the overwhelming majority of investors, are standing pat. They want to see how the second half pans out.

But in those six days, the Dow lost 350 points, or roughly 3 percent of its total value. The Nasdaq, not surprisingly, shed 245 points, or 9 percent of its value.

"There are two big factors that worked together in this latest downturn," said Don Collier, an analyst at ProLytix Corp. "You had tech stock make some great gains in the first half of the month, from disk-drive stocks to fringe Internet players. Second, Greenspan hit the hot buttons in his Humphrey-Hawkins address."

What makes this steep decline all the more ridiculous is the fact that so many technology companies reported second-quarter earnings that were at least as good or better than analysts had expected.

We're not talking about bit players, either.

Since July 16, when the major indices hit their pinnacles, companies such as International Business Machines Corp. (NYSE: IBM), Microsoft Corp. (Nasdaq: MSFT) and America Online Inc. (NYSE: AOL) all topped analysts' estimates by a considerable margin.

If anything, this should have spurred the market higher, even accounting for the predictable post-earnings selling that usually accompanies great earnings reports.

Instead, investors pushed the panic button following the Fed's comments.

Well, that's not entirely true. Take a close look at the volume, or rather lack thereof, in the past couple trading days.

But so much of this "panic" is based on semantics.

Anyone who claims to really know what Greenspan & Co. are thinking should not be trusted. Half the time, the Board seems to contradict itself.

Greenspan is as famous for shepherding the greatest bull market in history as he is for his cryptic and extremely conservative public testimony. He's a man who recognizes his power and chooses, refreshingly, to maintain a low profile. He avoids making bold proclamations in either direction.

His plodding, deliberate style is disconcerting to today's market makers who are used to moving at the same breakneck pace as the technology that's made this economic explosion possible.

Let's take a closer look at what Greenspan really said:

During the testimony, Greenspan said the Fed would act "promptly and forcefully" if it saw signs of evidence of rising inflation. He also warned against the possibility of a "euphoric" run-up in stock prices to unsustainable levels.

So what's new?

He's used those exact same words repeatedly in public and private for the better part of two years.

Are stocks trading at unsustainable levels? No. No way. Unless you believe investors are suddenly going to cash out and shove their money into mattresses or into T-bills.

One way or another, the bulk of that money, that liquid capital, is going to stay in the market. It's just a question of where.

Has there been evidence of rising inflation? No, not really. Both the Consumer Price Index and Producer Price Index came in well below analysts' expectations earlier this month. Those two factors combined with a relatively calm unemployment rate imply that inflation is still firmly in check.

Yes, yes. More people are buying homes than ever before according to Monday's report. But that's probably more a reflection of a strong economy and stock market than a sign that home buyers are worried about interest rates.

Hell, it's the middle of summer. That's the peak buying season in any economy.

The reason this is pertinent right now is Greenspan will take his mysterious act to the Senate Wednesday and you can bet the market will be anticipating his mood and comments in Tuesday trading.

Call me crazy, but after the huge losses absorbed in the past week, the market will bounce back with a fervor Tuesday. Maybe a 100 point upswing on the Dow and 40 points for the Nasdaq.

Some market analyst somewhere will "predict" that Greenspan will have positive or, at the least, benign comments come Wednesday.

Guess what?

Greenspan always has something positive and benign to say. Even when he raises interest rates, he sprinkles in a little goodie for Wall Street such as the Fed's recent decision to move to a "neutral" bias.

Keep that in mind Wednesday.

If anything, Wall Street should have the best understanding of the predicament facing Greenspan and the Fed.

The economy is as strong as it has ever been. Technology is improving production and reducing costs for industry at an unprecedented pace. This thing called the Internet is revolutionizing every aspect of human life, creating jobs, more technology and more capital in its infancy.

Just when you think Microsoft or IBM can't do anymore, they shatter sales, earnings and market share estimates.

And Intel Corp. (Nasdaq: INTC), coming off a relatively disappointing quarter, is telling Wall Street the second half of this year will be above even their lofty expectations.

Does anyone else see the pattern here?

Pity Greenspan. He has to face the world with a straight face and tell us that we should guard against "irrational exuberance."

My question is: What does that mean anymore, Alan?"