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Stocks Fade to Mixed Close After Early Rally

Sarina Penn

Stocks lost steam on Friday, and booked an uneven finish, as oil prices rebounded and enthusiasm faded for an employment report that wasn't nearly as bad as economists were expecting.

The Dow Jones Industrial Average, up some 120 points earlier, surrendered most of those gains to close up 48.2 points, or 0.37%, to 13,058.2. The S&P 500 tacked on 4.56 points, or 0.32%, to 1413.9. Turning in the worst performance was the Nasdaq Composite, which ended down 3.72 points, or 0.15%, at 2476.99 amid dismal results from Sun Microsystems (JAVA Quote - Cramer on JAVA - Stock Picks).

Breadth was mixed to end the week. Roughly 1.96 billion shares changed hands on the New York Stock Exchange, with advancers topping decliners by nearly a 3-to-2 margin. On the Nasdaq, volume reached some 2.28 billion shares as losers edged past winners 5 to 4.

"There was a big rush upwards yesterday, and I think that may have sapped most of the good news," said Edgar Peters, chief investment officer with Pan Agora. In the prior session, stocks soared in late reaction to the Federal Reserve's shift to a neutral tone earlier this week, when it cut the overnight lending rate by another quarter-point.

"Part of yesterday, I have a feeling, was a lot of short-covering," said Peters. "So that already took out a lot of the good upward momentum. The news today was good, but not good enough to sustain that momentum."

Still, thanks largely to the rally in the prior session, all three equity measures have achieved healthy gains for the week. Since Monday, the Dow has lifted by 1.3%, the S&P has added 1.2%, and the Nasdaq has spiked 2.2%.

Today's unwinding came as crude-oil prices surged to take back some of their big losses over the past few days. Crude futures settled up $3.80 to $116.32 a barrel. Gold, meanwhile, added $7.10 to $858 an ounce.

Even so, investors continued pulling their funds out of the safe haven of Treasury securities. The 10-year note lost 23/32 in price to yield 3.86%, and the 30-year bond tumbled 1-9/32 in price, yielding 4.58%.

At the same time, initially robust gains for the U.S. dollar tapered off somewhat, though the greenback was still stronger, adding 0.3% against the euro at $1.5413. Against the yen, the dollar firmed by 0.9% at 105.31.

Each of the indices had launched the session higher in reaction to the Labor Department's nonfarm payrolls data, which showed a decline of 20,000 workers in April, whereas a Bloomberg survey predicted the number would be more around 75,000. Earlier this week, the ADP's figures showed a better-than-expected climb of 10,000 jobs last month.

"Basically, what I really think this indicates is that the economy is flat-lining, and right now flat-lining is better than what the market perceptions were," said Michael Strauss, chief economist with Commonfund, who had put the job-loss figure at 25,000. "It suggests that we're not getting the recession that a lot of economists and market participants have been forecasting for the past six to nine months."

"Historically, when we've been in the heat of a recession, we lost 250,000 jobs a month," Strauss continued. "We've lost 250,000 for the quarter. That's a stagnant economy, not a down economy."

Owen Fitzpatrick, head of equity strategy with Deutsche Bank Private Wealth Management, noted that, because the focus has shifted from worries about the financial sector to unease regarding whether or not the slowdown is transforming into a recession, the data "does alleviate some of that concern."

Still, his firm continues to call for a mild recession in the second and third quarters. Also, because the slowdown is being led by consumers, who are dealing with a host of issues aside from the housing crisis, he also doesn't expect the recovery to be a quick one.

"I don't think we're out of the woods yet," he said.

The unemployment rate unexpectedly improved slightly, falling to 5% from 5.1% the prior month. Meanwhile, revisions were minor for February and March, with only an additional 1,000 jobs lost.

Hourly wages picked up only 0.1% sequentially, compared with a 0.3% rise in the prior month, which Strauss believes was the best bit of news in the report. He pointed out that, while commodities have brought on inflationary pressures, if labor costs don't hang on for the ride, overall inflation can be kept under control.

"It makes even more sense for the Fed to be doing what they're doing," said Strauss, referring to the central bank's months-long series of interest-rate cuts, which some observers feared would exacerbate inflation. "We've got an input-cost problem with 12% of the goods in the economy: commodities. Away from that, we don't."

Elsewhere on the economic docket, the Commerce Department reported that March factory orders ramped up 1.4%, a full percentage point better than expected, and up from a revised 0.9% drop in the prior month. Nondurable goods -- such as food, clothing, and tobacco products -- had the strongest showing, bumping up 2.6% after three straight months of negative to flat growth.

Also, the Fed announced it would boost its term auction facility to $150 billion from $100 billion previously, a move that makes more funding available for financial institutions.

On the corporate front, Sun Microsystems weighed on tech shares, plunging 22.6% after the server maker swung to a $34 million loss in the fiscal third quarter and issued soft sales guidance for the current one, blaming tough economic conditions.

Staying in the tech space, The Wall Street Journal reported that merger talks between Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) and Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) have intensified several days after the uneventful passing of Microsoft's stated deadline for Yahoo! to accept its stock-and-cash takeout bid. Further, a blog on The New York Times' Web site said Microsoft has upped its offer by "several dollars," citing anonymous sources.

Microsoft, which has been trying to pressure Yahoo! into accepting its offer for three months, had warned the Internet-portal operator that it would go hostile if the offer wasn't accepted by that deadline. Yahoo!, however, continued insisting that the deal undervalues the company. Earlier today, the Journal had reported that Microsoft could appeal directly to Yahoo! shareholders as early as today.

The paper also said Yahoo! could, within a week, announce an agreement to carry search ads from Google (GOOG Quote - Cramer on GOOG - Stock Picks) -- seen as a possible strategic alternative to getting bought out -- according to people familiar with the matter. Microsoft shares were off 0.5% as Yahoo! jumped 6.9%.

Elsewhere, Countrywide (CFC Quote - Cramer on CFC - Stock Picks) was a late laggard after Bank of America (BAC Quote - Cramer on BAC - Stock Picks) announced that it might not assume Countrywide's considerable debt as part of its agreement to buy out the mortgage lender. In a regulatory filing, BofA said it "has made no determination in this regard, and there is no assurance that any of such debt would be redeemed, assumed, or guaranteed."

Standard & Poor's subsequently cut Countrywide's credit rating to junk status. The stock closed down 1.2%, and BofA ended 1% higher.

Back in earnings, Dow component Chevron (CVX Quote - Cramer on CVX - Stock Picks) joined its oil-and-gas brethren in reaping rich profits from the recent spike in crude futures, and first-quarter income jumped 10% at $5.17 billion. Shares were up 40 cents at $95.32.

Viacom (VIA.B Quote - Cramer on VIA.B - Stock Picks), which owns MTV and other media properties, said first-quarter revenue was up 15% to $3.12 billion, partly thanks to strong sales of the Rock Band music-video game. The company's adjusted profit of 44 cents a share topped analyst predictions. Still, after a higher start, shares finished down 1.2%.

Insurer MetLife (MET Quote - Cramer on MET - Stock Picks) ticked up 23 cents to $62.17 after operating earnings topped the first-quarter consensus, even as shriveling investments dragged its overall profit down 37%.

Also, engineering-and-construction concern KBR (KBR Quote - Cramer on KBR - Stock Picks) more than tripled its first-quarter earnings to $98 million, or 58 cents a share, handily beating the 34-cent analyst consensus from Thomson Financial. Revenue surged to a better-than-anticipated $2.52 billion. The stock advanced 5.9%.

Wynn Resorts (WYNN Quote - Cramer on WYNN - Stock Picks) saw choppy trading on mixed first-quarter results. The casino-resort operator posted a 20% profit drop, falling a penny short of per-share analyst projections, but revenue was better than expected. Shares spent most of the morning in the green, but ended off 16 cents at $108.03.

In notable analyst research, Bank of America cut clothing retailer Gap (GPS Quote - Cramer on GPS - Stock Picks) to neutral, but stamped RadioShack (RSH Quote - Cramer on RSH - Stock Picks) with a buy rating. Gap shares slid 1.8%, and RadioShack gained 2.2%.

Among other negative calls, Jefferies took drugmaker Allergan (AGN Quote - Cramer on AGN - Stock Picks) down to hold from buy, Citigroup downgraded discount-travel Web site Priceline.com (PCLN Quote - Cramer on PCLN - Stock Picks). Shares were off 5.3% and 1.5%, respectively.

Markets abroad were tracking higher. In Asia, Tokyo's Nikkei 225 climbed 2.1%, and the Hang Seng in Hong Kong tacked on 1.9%. As for Europe, the FTSE 100 in London surged 2.1%. Germany's Xetra Dax and the Paris Cac jumped 1.4% and 1.5%, respectively.