This week's economic data showed the economy slowing enough to make additional interest rate hikes less likely. That nudged the market higher.

For the week:

Dow -0.3%

Nasdaq +0.4%

S&P 500 +0.6%

S&P Midcap 400 +1.8%

S&P Smallcap 600 +0.7%

May brought the worst monthly decline in nearly two years:

Dow -1.8%

Nasdaq -6.2%

S&P 500 -3.1%

S&P Midcap 400 -4.6%

S&P Smallcap 600 -4.7%

On Tuesday, Wal-Mart (WMT) created a consumer slowdown scare when it reported that May same-store sales should be up only 2.3%, the low end of its previous 2%-4% projected range. Confirming the Wal-Mart report was a 6% drop in May consumer confidence, the steepest decline since September.

Why these two reports came as a surprise to investors is a mystery to me. The point of the Fed's raising interest rates for the past two years has been to curb spending to keep prices in check. It's working. Also, note that spending is not disappearing, it's just coming in slower than its earlier peppy pace. As far as Wal-Mart’s concerned, I consider a strapped consumer to be good for the company because shoppers with less money in their wallets will go where prices are cheap, and that's Wal-Mart.

Wednesday brought the release of minutes from the May 10 FOMC meeting. They showed that the Fed considers the economy to be robust and at risk of causing inflation. One sentence read that recent data suggest upside risks to inflation had risen somewhat since the time of the March meeting.

Fed funds futures thought that meant a June rate hike is in the cards. On Wednesday, the odds rose to 72% from an earlier 56%. On Thursday, they hit 80%. We'll get to Friday in a moment.

Goldman Sachs, however, thinks the consensus is wrong. The firm acknowledged that the Fed is leaning toward another increase, but stuck to its forecast that the Fed will pause in June.

On Thursday, the Institute for Supply Management (ISM) manufacturing index fell more than expected to 54.4 in May vs. 57.3 in April. It hasn't been this low since August. New orders came in at 61.9 in February but only 53.7 in May, showing that economic growth is indeed slowing. However, a number above 50 shows an expanding factory sector. As with consumer spending, manufacturing activity not shrinking, it's just not growing as quickly as before.

Friday brought the week's most influential report: employment. It came in soft. Non-farm payrolls increased just 75,000 in May. That's the smallest gain since October, and less than half of the 170,000 expected. Hourly earnings rose only 0.1% instead of the 0.3% expected, far less than April's 0.6%.

A weak employment picture should mean less inflation pressure. People without jobs or with less income buy less, and that means prices should rise less.

Thus, Friday's report supported Goldman Sachs's case for a Fed pause in June, and Fed funds futures ended the week with only 48% odds of a June rate hike.

Sometimes, it’s hard to see a bigger picture through the daily reports and rapid news cycle. Look how dramatically the Fed funds futures on the odds of a June rate increase changed this week in response to the data:

Tuesday: 56%

Wednesday: 72%

Thursday: 80%

Friday: 48%

Keep in mind that the world’s supposedly savviest traders comprise the futures market, and even they bounced around like billiard balls as the data came in.

Yet, a plausible story is forming in the haze of information. There are not so many different scenarios in front of us. As I see it, there are just two:

- the Fed pauses in June, or

- it raises rates one more time, and then signals a pause

Either situation should provide a short-term boost to stocks. Then, the slowing economy that brought an end to rate increases will settle across the market like a dense fog, and we'll probably see weakness in August/September.

It’ll be a thought process along these lines: “The Fed stopped? Great! Better buy.” Then, a while later, “Wait a minute. They stopped because the economy has slowed down? Ugh. Better sell.”

In fall, though, investors will see that company earnings have slowed, but haven't stopped. They'll still be in the healthy single digits. That epiphany will come right about the time a massive PC upgrade cycle begins ahead of the January release of Windows Vista. These factors should contribute to a fall rally that extends into early 2007.

I anticipate that it will be led by the technology sector, which is beaten down at the moment. That's why I advise investors to use weaker prices over the summer to bulk up their technology portfolios in anticipation of better times in the fall.

At the end of May, Dell Computer founder Michael Dell bought $70 million worth of Dell stock at $23.99, only the second time ever that he has made an open-market purchase of the company's shares. That's a powerful vote of confidence.

Sometime prior to August, I’ll be looking to take some profits and open positions in bear market funds or ETFs. Then, when all looks lost in a sea of weakening earnings, I’ll wade back in for the rally.