Those institutions who stayed out of the market last week on fears that the figures would show a strong pick-up in the US economy will no doubt feel vindicated.

The stage is now set for a further interest rate increase when the US Federal Reserve meets on May 17.

The question every trader will be asking himself this week is: just how high can a dead cat bounce? The latter half of last week saw the market recover after having dropped to its lowest level this year.

With fundamentals unchanged, or perhaps a little worse, and sentiment still largely negative, most traders reckoned the rebound was technical rather than based on any renewed confidence in the Hong Kong stock market.

Last week marked a turning point in the psychology of the market.

Brokerage reports aside, there was at last a lowering of collective sights for the performance of the market this year.

Most analysts have belatedly admitted that the market is unlikely to hit a new high this year and that the consolidation will go on for longer than anticipated.

In 1987, the sudden crash of the market on Black October marked the turning point of that cycle and an end to the great bull run.

While it may seem too premature to say that this market won't rally in spectacular fashion towards the end of this year, it is all too obvious that the US rate increase of February 4 has ushered in a period of increasing interest rates that will make it difficult for stocks to rally like they did last year.

The sleeping bear has been woken, and there is no sign that he is heading back to hibernate.

Hong Kong is not alone in having fallen, it is just that the great highs of last year, when the party was in full swing and money was flowing in like ambrosia, has now given .5 per cent, and Bombay up by 41.3 per cent.

The one-year performance figures present a more comforting picture for investors.

The Hang Seng is up 31.3 per cent from its level a year ago, compared to 28.7 per cent in Singapore and 46.5 per cent in Kuala Lumpur.

The only Asian market down over that period is the Nikkei, which is down 5.7 per cent on the year.

On a fundamental basis, the Hang Seng does look strong compared to other Asian bourses, especially given that it is trading at a P/E ratio of around 12, the lowest it has been for some time.

But with world markets so uncertain and investors unprepared to commit funds, it is unlikely that the market will see strong buying on fundamental grounds.

The key indicator of buying is, of course, volume.

Until the market sees a strong pick up in volume, with the index either going up or down, the big players are unlikely to plunge in.

Last Friday's 200-point rally was largely technical, with a lot of short covering ahead of possible buying from Japanese houses when they return to work today after the Golden Week holiday.

Hedge fund managers were essentially covering their positions ahead of possible buying from Japanese institutions, who have shown their willingness to enter the market as buyers below the 9,000 level.

However, even the Japanese would have to be brave to enter as strong buyers into a market which touched the year's low in the previous week and had finished the week on a strong rally.

There is probably some more room left in this rebound, but most traders are moving into a defensive position expecting further falls rather than for the market to keep rallying.

About the only positive news the market could have heard was a resumption of talks on airport financing.

That too has been ruled out by Lu Ping, along with warnings that Hong Kong could see chaos in the lead-up to 1997.

While the rhetoric will probably flow off the market like water off a duck's back, the real message from Lu Ping's address should not be overlooked.

That is: there can be no agreement on important matters for Hong Kong while China and the Government remain at loggerheads.

While other markets have only to contend with rising interest rates, Hong Kong is also saddled with peaking earnings, a collapse in residential property prices, a declining political picture in China, and no chance of a better political picture in the territory.

It's no wonder many fund managers are also re-evaluating their Hong Kong portfolios, which could see further pressure added to the market this week.

Funds which have been heavily weighted in Hong Kong stocks over the past six months have been the biggest losers, and overseas fund managers in particular are becoming more inclined to pull the plug on Hong Kong stocks rather than hope for a turnaround. The low volumes will make it difficult for many of them to reduce their holdings quickly.

Instead, we are likely to see fund managers selling into rallies to get the most from their shares and avoid pushing the market down because their sell order is a large one.

way to a huge hangover.

The Hang Seng Index is now down 3.9 per cent compared to where it was six months ago, and is the only Asian bourse besides Jakarta to be down over that time frame.

By comparison, Singapore is up 1.3 per cent, Kuala Lumpur up by 1