The markets on Friday saw unloading of positions, following the trends in the US stock markets. Market analysts there are now worried that the sustained rise in interest rates would start telling on corporate margins, sooner than later. But right now, the Fed does not appear to be unduly worried that its actions could land the economy in a hard landing. At least, not yet.

Sure, there are signs of a slow down in the economy, but it makes sense to wait for more confirmation. As I mentioned last week, all said and done, the Fed is unlikely to be taken in by factors in the short run. It cannot afford to act in a knee-jerk fashion, a style more seen among stock traders.

Consumer demand, an important indicator for the rate of economic growth is still marked by spikes, as happened in consumer electronics. So, the Fed has not abandoned its stance on tightening the interest rates. It has not made a move just now, leaving sufficient hint that it could still act in August.

Stock markets in the US have reacted cautiously to this stance. If the Fed comes up with a hike which could be up to 0.5 per cent, fund managers there would have to mull over the likely consequences. The cost of borrowing, which has gone up substantially over the last eigteen months and with some more to come would end up denting profit margins. While that may be the worry for fund managers and corporates, the Fed is likely to seized of the longer and deeper implications of there being no let-up in inflation. After all, its intention is to manage the economy without violent upheavals, which is what will happen with an untamed inflation. If inflation does not cool off, that is quite serious. It can have a cascading effect. So, it is still time to be on the watch tower.

Nor would the Fed have any reason to be delighted about stock markets spiralling up again. The more the buoyancy, the more will be consumer spending. That would again bring down the unemployment rate, put pressure on wage rates and ultimately fuel inflation. A tricky situation, indeed. There are redeeming feautures though, like the intention of the US government to buy back treasury bonds.Sum it all up and you can see that the US markets will be marked with quite some volatility in the next 4-6 months, if not longer. With interest rates rising, bonds would compete with stock markets.

Any fragility in the stock markets then will lead to further deterioration.Now back to Indian stock markets. Operators have been doing front-running hoping that FIIs would come in with buying orders. But that has not happened yet. On the contrary, both FIIs and mutual funds have sold.

If the operators are not too scared by the FII and MF selling, it has its reasons. Since the markets have risen, it makes much sense to book profits. It is quite a different matter, that there is more upside. If the annual returns are to be targetted, to at least say 19 per cent, it is imperative that FIIs sell now. What might surprise FIIs is that their sales have been absorbed by operators. Ultimately, it is a tussle out there between two or may be three major group of players.

The question now boils down to whether the operators would be able to hold out until the first batch of results from software companies start flowing in. After all, most of the build-up has been in select scrips. These operators must have counted on the fact that we are passing through a momentuous period - the Fed action, its likely fallout, and the anticipated quarterly results here.

The fall-out of the Fed action on the US markets is yet to crystallise. Next week should bring some clarity. In anycase, if the Indian operators make bold to hold on to their positions, it is also because there are no negative signals from the economy.

The fund managers and long-term investors here now face a challenging situation. As the Fed tries to cool down the US economy, the latter is bound to go through a tumultuous phase. Investors will be forced to switch to short-term operating strategies than long, in addition to going on selective mode. As Indian bourses mimick US markets, the long-term investors here will have to contemplate the consequences of making an entry now. August 22 will be a crucial date and not too far off.

So, whosoever invests now will have to face the consequences of whatever direction the market will take by August end. Alternately, play the very short-term. But this short cannot escape looking over its shoulder time and again. And that could well explain the FII hesitancy to come in aggressively at the current time and price levels.

It would make excellent sense to wait for a breakdown. And that can happen if the US markets do that. It is too fresh right now after the Fed held its hand. Next week should give some critical clues.

In the meanwhile, be on your guard for an engineered breakdown. Do you get me?