Updated from 2:29 p.m. EDT

"It's all good" is a euphemism I've used repeatedly to show traders have accentuated positive developments since the March lows, largely ignoring potential risks. Early Friday, the euphemism became reality as a slew of positive developments helped unleash another torrent of buying, and short-covering.

A smaller-than-expected loss in May nonfarm payrolls, a hostile $5.1 billion buyout offer for PeopleSoft ( PSFT) by Oracle ( ORCL), and Intel's ( INTC) midquarter update late Thursday set the stage for big gains early Friday.

But after the morning's big run-up, the rally lost some steam, presumably to profit taking. This underscores what is so often the case on Wall Street: The time to sell was when things looked best -- just as the time to buy was when things looked worst, as they did in mid-March.

After trading as high as 9215.88 at about 10:15 a.m. EDT, the Dow Jones Industrial Average retreated through midday and was up 0.3% to 9072.46 as of 3:10 p.m. EDT. The S&P 500 was lately down 0.1% to 989.13 after having traded as high as 1007.69 while the Nasdaq Composite was Comp down 0.7% to 1633.90 after having traded as high as 1684.10.

Traders said some profit-taking was to be expected in particularly red-hot sectors such as biotech, semiconductors and Internet, as well as homebuilders. Midafternoon weakness in each of those groups was contributing to the Comp's slide and other proxies' fall from early heights. The Amex Biotech Index was lately down 1.7%, the Philadelphia Stock Exchange Semiconductor Index was down 1.3%, the Philadelphia Stock Exchange/TheStreet.com Internet Index was lower by 1.2% and the S&P Homebuilding Index was lower by 3%.

Homebuilding stocks were hurt by weakness in Treasuries, which were unwinding expectations for a 50-basis-point rate cut by the Federal Reserve later this month. The May employment report showed nonfarm payrolls falling a less-than-expected 17,000 while April's job loss was revised to unchanged. Although the unemployment rate rose to a nine-year high of 6.1%, that was in line with projections and the report raised hopes of a turnaround in labor markets; or, at least, some stabilization in the rate of job losses.

(On the other hand, the National Employment Law Project, a Washington, D.C.-based advocacy group, issued a report Friday declaring: "The overall unemployment rate and initial jobless claims are worse than they've been at any point in the recession, and now it's taking people even longer to find work. No one should be fooled by today's report, there's no jobs recovery in sight.")

Fed funds futures are still forecasting an ease this month, but the Fed may hold off if data between now and June 24-25 show upbeat signs. That's potentially good news because some observers worried about the long-term risks of the Fed becoming overly accommodative.

Another Brick in the Wall

When stocks have as dramatic a surge as occurred Friday morning -- a "gap opening" in technical parlance -- there's a temptation to declare the market to be in a blow-off stage, heralding the end of the rally. It's particularly tempting to make such declarations after a sharp rally preceding the gap, as is the case with current action. Additionally, many technically inclined traders had forecast the S&P 500 would face resistance above 1000, as proved to be the case midday Friday.

Rather than talking about reasons why the rally will continue, the bulk of commentary Friday morning was about why the opening burst represented the end of the advance, at least for the short term. Such prognostications may prove correct, and clearly there are many fundamental reasons to question the advance. But the crucial point is that for all the excitement about shares lately, an undercurrent of skepticism remains intact.

Notably, both the CBOE Market Volatility Index and its Nasdaq counterpart were up midday Friday. Both, particularly the VXN, have been creeping higher in the past week or so, albeit from depressed levels. The CBOE put/call ratio has spent most of this week below 80, but there has been heavy put buying of Nasdaq 100 futures and the Semiconductor Holders Trust ( SMH), among other tech proxies.

"Traders are betting much more against the Comp than the S&P 500 and the Dow," observed Phil Erlanger of Erlanger's Squeeze Play, who himself has been persistently skeptical about the sustainability of the postwar rally. "The sentiment picture that is evolving with the action of the averages is one of growing disbelief on the part of options traders. Given the short squeezes going on in technology and biotechnology, the Nasdaq market remains in a short-squeezing mode."

Certainly there's evidence of wild speculation in some stocks and sectors. But in the main, the prevailing mindset on Wall Street is one of skepticism or, at best, a "pinch-me-I-must-be-dreaming" sense of cautious optimism. Anecdotally, reader email is at least 3 to 1 in favor of the pessimists vs. the bulls. Equity funds enjoyed inflows of $1.4 billion for the week ended June 4, according to AMG Data Services, but that trailed inflows of $2.4 billion into taxable bond funds and $5.8 billion into money market funds.

From a contrarian point of view, all that suggests the rally has not breathed its last just yet.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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