At this point, no one knows for certain just how fast and far interest rates will rise in the U.S., cutting off those pockets of inflation that sit atop speculative bubbles. If rates rise slowly, there may be time for the underlying economy to gain traction. At least that is the hope.

As to expectation, securities traders tend to walk the talk. The more concerned they are about a hard economic landing fueled by skyrocketing interest rates, and a rally in the USD, perceived by others as needed to burst bubbles and address twin deficit issues once and for all, then the more likely traders are to walk with their feet, taking capital out of equity markets for a time.

Morgan Stanley's Stephen Roach is again drumming up marchers, sounding his Armageddon tune this weekend " every Easter now I think for the past four " but maybe he will finally get his timing right. If so, there will be a lot of capital leaving capital markets this 2Q05.

I don't know the answer, but I know I don't want to be wrong. So, at times like this, the hold period for one's average trade " long or short " has to be cut to a month or so. As the house of money is more looking like a house of cards, traders are nervous, and looking for windows to jump from.

In my case, it's a matter of working through each of the ten sectors of the equity market to try to get a handle on market trend and cycle direction. So, let's get started trying to figure out where the market is likely headed for the next 90 days.

Sector 10

2Q2005 Review:

The Energy sector did peak at the beginning of March, and had a significant pullback for the rest of the month. Still, the sector was much stronger in 1Q05 than I had expected. Light Sweet Crude moved from $43 at the beginning of the quarter to $58.10 in the 3rd week of March, surpassing my cycle top expectations of $54.

This quarter, it appears that crude oil is headed to a test of the 40-week Moving Average of $47 from its late-March price of just under $55. That ought to be sufficient pressure to take the XLE Energy SPDR down 10 percent or more during the quarter.

A key factor to watch will be economic growth rates in Europe and Japan, which have been weak. Should they continue to be weak, and the hot 4.0 pct growth rate of the U.S. come off in 2Q05 to say 3.0 pct or lower, then prices of crude oil and energy sector stocks will continue to slide.

After a probable sell-off in energy stocks, the ones I really like long-term are: CEO, CVX, IMO, LUKOY, PBR, PTR, STO, SU, TOT, and XOM (alpha order). Remember, these are companies I like; I only like buying the stocks after a sell-off.

Note that the Canadian oils (Imperial Oil and Suncor) appear to be holding up somewhat as the sector came off in late 1Q05. But this phenomenon might not last.

When oil prices are high and rising, long-term investors always take a look at the Canadian western oil & gas industry, and the huge oil sands play. The oil sands, however, represent a high-cost resource, which seems to lose luster every time world crude oil prices fall.

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Sector 15

2Q2005 Review:

The yield curve in the U.S. has been relatively flat from the two-year to the 30-year and the spread (3-month to 30-year Treasuries) has been at an average level of about 215 in March, which means that investors are not forecasting rapid 2Q05 growth in the U.S.. If they were, the yield curve would be sloping gradually upward and the spread would be headed back toward 300.

Economists are saying that the U.S. economy is growing at 4 percent, but investors do not believe that or else they believe that rising interest rates, high oil prices, or the end to speculative excess " take your pick " will cause the growth to slow.

Another concern for investors is that the 9.5 pct economic growth rate in China might soften soon, as interest rates will probably rise there too.

The question is, as the Fed continues to tighten; will there be a hard or soft landing. In any event, of all ten equity market sectors, the Basic Materials sector is probably the one that best mirrors the state of the economy.

As to equity prices, investors are now saying there will be a landing " hard or soft -- and that Basic Materials sector stocks will likely continue south this quarter, after having a modest improvement in 1Q05.

For this sector, but not this quarter, I like BHP, DOW, GGB, LYO, MHV, NILSY, NUE, RIO and VCP (alpha order). And you know I like the golds any time in 2005, including ABX, GG and NEM (alpha order), among others.

Barrick Gold (NYSE: ABX) has much new production coming on stream in 2005.

Goldcorp/Wheaton (NYSE: GG) will continue to make small acquisitions that are accretive. This is a gold (and copper-gold) mining company with the lowest cost of production and a management team that is destined to grow much larger.

Newmont (NYSE: NEM) has an excellent diversified group of mines plus probably the world's best gold industry intelligence. An old friend, Pierre Lassonde, president of Newmont, is becoming head of the World Gold Council this year, which is a marketing organization that promotes gold (and I digress, much like broker-dealers promote stocks, which is to say always in a positive vein). (Pun intended, though weak.)

I happen to be in the camp that says gold prices will soon start to become less correlated with the USD and more so with the CPI/PPI. That's not to say gold prices will run wild here " because they will likely not. One factor that could make gold prices skyrocket would be a deflation following a real estate bubble collapse, where the Fed would reflate in order to save a destabilized financial system in the U.S., which is a possibility that many now see as more likely than a year ago.

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Sector 20

2Q2005 Review:

The Industrial Goods sector went through a double top in March 2005, which matched the December 2004 cycle top. Without strong economic growth, these stocks are likely going to decline in market cap in 2Q05. The stock prices in some cases have been held up because of enormous share buy-backs. The bottom line, however, is that these stocks are not getting stronger.

This is a sector that always does well in the U.S. when Congress gets into a free-spending mode, but the facts are now on the table; stop spending or start taxing. Part of that solution, of course, is to cut the gargantuan defense department budget " send your man to the World Bank and cross your fingers he can persuade other nations to cover the costly bills of fighting terrorists.

For this sector, but not this quarter, I like ASD, ERJ, GE, HOV, MCO, MMM, TK, and UTX (alpha order).

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Sector 25

2Q2005 Review:

The Consumer Cyclical sector had a bad quarter as stocks were down on average about 6 pct. It appears that investors will see more of the same in 2Q05. The problem here is related to jobs and spending, and while there have been signs of improvement; there are other factors that loom large, such as higher commodity prices and interest rates.

GM had a terrible 1Q05 but may be over the worst of its problems, although the upside will be a difficult journey. If interest rates rise too quickly in 2Q05, the debt-laden GM stock might come down again.

The other three Consumer Cyclical stocks of the Dow were down in the 1Q05, although with Disney (NYSE: DIS) naming a new CEO there are investors already looking forward to 2006. A weak 2Q05 economy however would hurt the media and leisure park revenues.

Home Depot (NYSE: HD) is facing challenges, as its stock was far over-bought in 4Q04 because of higher sales and profits due to massive reconstruction and renovation projects to recover from four hurricanes in the southeast. Higher interest rates this quarter will likely sap the interest of reno-oriented house speculators, too.

For this sector, but not this quarter, I like ATVI, BBBY, BC, CCL, CD, DIS, EBAY, EK, ERTS, FUJIY, HCI, HD, JCP, KSS, KZL, NKE, SBUX and TM (alpha order).

The hospitality industry has recovered from a disastrous 2001-2002 period, but growth from here seems muted. The consumer economy in Europe and the U.S. seems to be the albatross.

A lot of readers I know like Starbucks (NDQ: SBUX) and Toyota (NYSE: TM) from this list, but they too are likely to come off in a broad market decline.

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Sector 30

2Q2005 Review:

KO had a very strong first nine weeks before coming off in price. PG and WMT suffered losses in 1Q05, but MO also had a strong first five weeks of the year before starting its decline. Overall the sector was marginally bearish for 1Q05, which may continue that way for 2Q05.

With a fairly flat yield curve however, these stocks may just out-perform some of the other stock sectors that will suffer in a ‘stagflation' environment. Along with healthcare, these are the usual ‘defensive' stocks.

The one big concern is that short-term rates, say the yields on Treasury debt instruments of 2-years or less, start to rise to a point where the high dividend yielders of the defensive Consumer Staples and Healthcare sectors no longer make sense to investors. And, short rates are clearly rising as the Fed tightens.

For this sector, but not this quarter, I like ABV, COST, DEO, PG, WAG and WMT (alpha order).

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Sector 35

2Q2005 Review:

There were some good weeks for bullish investors in the 1Q05 for the healthcare stocks in spite of the continuing negatives re Pfizer (NYSE: PFE) and Merck (NYSE: MRK), mostly to do with litigation. Still, net free cash flow for these companies is excellent, and they do represent good fundamental value, particularly PFE.

For the long-term (but not this quarter), I like AET, AMGN, GSK, JNJ, PFE, and UNH (alpha order). Recently, Amgen and GlaxoSmithKline both ran into regulatory issues, but like Pfizer and Merck, I think the long-run will work out.

Two things always seem to come into play when the economy is starting to look shaky. (1) Government starts to ratchet up the work (make-work?) of regulators, and (2) civil law suits seem to get popular. This is usually the ‘perfect storm' condition for attacking Healthcare companies, and some of the Consumer staples companies like the tobacco companies.

Whatever, it's a tough environment for investors.

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Sector 40

2Q2005 Review:

As forecasted, the interest-sensitive Financial sector came well off in the 1Q05. The four Dow financial stocks (AIG, AXP, C and JPM) all suffered a miserable quarter, and with interest rates rising (possibly quickly), and regulators putting more pressure on management to be careful how they move forward, the 2Q05 could be another tough quarter.

Generally, there is a concern in a rising inflation environment that the financial stocks will under-perform, but even though assets get allocated out of this sector at times like this, you can't ignore that the financial sector is the backbone of America. The best-managed companies, sooner or later, will see blue sky.

The ones I like longer-term (but not this quarter), based on proven management and financial strength, are: BBD, C, CBAUF, DB, DNSKF, ET (marginally), FITB, GDW, GS, HBC, KB, KRB, LEH, MFC, RBSPF, RY, UOVEY, and WBK (alpha order).

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Sector 45

2Q2005 Review:

Yes, it was a very tough 1Q05 for the high tech sector. If (per my 1Q05 musings) you had purchased the XLK ETF and shorted MSFT and IBM against it, you would have made a lot of money. But, it would have been best to under-weight the sector across the board in 1Q05.

Technology is a huge sector, and there are always some good stocks to hold long, but in the main the sector should be under-weighted again. Until there are signs of possible strength in the global economy " in terms of real wealth being created -- and a softening of interest rates at the short end, I am not inclined to venture blindly into this sector.

Earnings comparisons are going to be tough, and with rising interest rates, I believe the high PE multiples for the tech stocks will continue to fall.

Unless a company can report both (1) better than excellent results, and (2) higher guidance, for the quarter, the stock is likely to suffer a set back even if the performance results are not that bad. You see, in a bear phase, "not bad" just doesn't cut it.

On the other hand, what I look for after a big sell-off in a sector, particularly like 1Q05 in the volatile tech sector, is for stock prices not to fall following a poor-to-average performance report but an interesting one in terms of guidance.

The tech stocks I'd be focused on for the future (but mostly not this quarter) are: ADBE, DELL, INFY, LEXR, ORCL, QCOM, RIMM, SNDK, SYMC, TASR, and YHOO (alpha order).

Yes, I still like Taser (NDQ: TASR); all you needed to like this company is to have watched a TV news clip, in March, in which Toronto police officers put out an emergency call for Tasers but couldn't find any locally available while trying to apprehend a criminal, so rather than shoot the knife-wielding man with their guns, they deliberately drove their police car over him. In front of TV cameras, no less! You see, a police bullet ripping through a person's body in the city's downtown, filmed on the evening news, isn't acceptable to 95 percent of us in North America; but Taser weapons are. This technology is not going away.

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Sector 50

2Q2005 Review:

Dow 30 Telecom sector stocks SBC Corp (NYSE: SBC) and Verizon (NYSE: VZ) have been crushed in the 1Q05, so I was too early to show interest in them.

These are mostly interest-sensitive stocks (at least the old fixed-line group) that tend to fall with the Financial sector, and they did here too. There is also some concern that the economy is not growing quickly enough for consumers to want the new mobility services, and in fact just might want to cut back after a rapid round of early adoption.

During a bear phase in the equity market brought on by Fed tightening and rising interest rates, PE multiples typically move down, and particularly so in the telecom services sector. But, right now the PE's of SBC and VZ are already down to a reasonable level, however, so I'd be surprised if these two key Telecom sector stocks continue to under-perform the Dow 30 in 2Q05.

Looking around the world, I see a number of superbly managed telecom services companies " mostly in the fast growing mobile phone market of emerging economies like China and Russia. Longer-term, I like China's CHA and CHL, and Russia's MBT and VIP " all large cap stocks and companies that have made my Global Best 100 list based on quality and value factors. All these bear watching.

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Sector 55

2Q2005 Review:

In 1Q05, the Utility sector did rally, far more than I had anticipated. Even in the last week of the quarter, there was a bounce up off the 50-day Moving Average.

I'd think the sector could even improve from here, but doubt that will happen. You see, short interest rates are rising quickly " the U.S. 2-year Treasury rate is 3.84 pct, which is getting up close to the range of dividend yields in the Utility sector. Pretty soon, there will be no reason to hold most of the Utility stocks.

One of the Utility stocks I do like " for business growth reasons -- is Exelon Corp (NYSE: EXC). It closed Easter weekend at $44.76, down from its March high of $47.16, and has a bit to go on the down side before I'd buy it. Besides, the 17.0 PE is too high; but I still like this company longer-term " one of the few in the Utility sector. I am a real believer in the need for nuclear power.

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In summary these are weighty times in equity markets. The hot air seems to be coming out of share prices and the dead weight more noticeable.

If this is your Easter Monday, have a good one.

But have a good one anyway.