Don't rush into the market just yet~

Despite a sharp rebound on Friday, after the Federal Reserve cut its discount rate, the major averages finished another turbulent week lower.

Stocks have traded in extremely erratic fashion over the past few weeks, with the the Dow Jones Industrial Average consistently showing triple-digit swings and the S&P 500 recently falling more than 10% below its peak – the definition of a market correction – before paring its losses. The volatile trading follows a period last month when both the S&P 500 and Dow saw record finishes.

The Fed's move on Friday to change its discount rate – the rate at which it lends funds to banks – from 6.25% to 5.75%, however, was a welcome relief for investors and helped calm the global markets amid signs that credit was drying up. To be sure, it saved the market from posting more sizable losses for the week and served as a welcome confidence boost.

The decision to cut the discount rate was especially notable since the Fed showed concern about the turmoil in the financial markets and stated that it is ready to help support overall economic growth if necessary. In other words, if it is necessary, the Fed will cut the fed funds rate, which it left unchanged at 5.25%.

I do not believe this market is ready to rebound back to a bull market just yet. The credit crunch is not yet over, as the Fed move is more like a band aid then a cure. Initially the market reacted to the Fed move with a 300 point advance. However, that increase lost steam as institutional investors and average investors both, sold into the strength. By 12pm ET, Dow was barely holding onto its triple digit gain. That move, demonstrates a lack of confidence for the sustainability of the rebound. Although Dow finished with over 200 point increase, investors should observe the market on Monday before jumping back into the market big time. Paying special attention to Financials and Construction.

The timing of the Fed's action was also notable as it followed in the wake of an alarming announcement Thursday from Countrywide Financial (CFC) that it had drawn down the entirety of its $11.5 billion unsecured credit facility to supplement its funding liquidity position.

Incidentally, Countrywide's news fueled a 300+-point drop in the Dow at one point on Thursday, before a furious short-covering rally in the financial sector late in the session brought the Dow all the way back to virtually unchanged for the day.

It didn't appear as if there would be any follow-through early Friday, though, as a global market sell-off, led by a 5.4% decline in Japan, had investors on edge. When news of the Fed's action broke, though, the tone changed dramatically and stocks rallied out of the gate. The indices didn't close at their highs, but they finished the week on an upbeat note.

In other developments this week, the Commerce Department on Thursday showed that July housing starts fell 6.1% to a 1.381 million annual rate as builders continue to struggle with the housing downturn. That was down nearly 21% from the year ago level and marked the slowest pace since January 1997. Homebuilding stocks, not surprisingly, remained under heavy selling pressure.

Wal-Mart (WMT), meanwhile, posted disappointing second quarter results and offered a bleak outlook for the remainder of the year, exacerbating concerns about consumer spending. The retailer attributed the disappointing performance to pressure from the housing market.

In turn, Home Depot (HD) reported its first quarterly sales decline in more than four years due to the housing slowdown, while mortgage REIT Thornburg Mortgage (TMA) said it will delay its second quarter dividend payment due to significant disruptions in the mortgage market and a subsequent increase in margin calls from creditors.

On the economic front, the July CPI inflation data on Wednesday was reasonably good, and in line with expectations. July CPI was up just 0.1%. The core rate was also up 0.2%. Those are reasonably tame numbers that reflect modest inflationary pressures. The July Producer Price Index produced a mixed result with a larger than expected 0.6% rise in total PPI and a smaller than expected 0.1% increase in core-PPI.

In this market, I have suggested to many investors to invest in more defensive stocks, such as food and energy. I would continue to advocate that. I know investors might want to just hold cash, and wait-it-out, so to speak. But remember, investing wisely in a downturn, would mean better than average return when the market recovers. Cash at best gives you 4-5% in a CD. A market rebound, as traditionally seen in American markets, can easily give you double digit gains in less than a year. Think about it~