Another week of heavy selling ended on a bright note Friday, as stocks rallied convincingly after a consumer price report that wasn't as bad as feared. The data didn't really soothe the palpable uneasiness that has overtaken Wall Street regarding inflation, a hawkish central bank and stretched consumers. In fact, bond prices fell, and their yields rose Friday, as the headline consumer price index rose at the fastest pace seen since September 1980. But the market's ability to react positively to the CPI report suggests that enough excess pessimism may have been priced into stocks in the sharp drops since Sept. 30 to create a tradable bottom (at least). One theme this week -- albeit a negative one for major markets -- was the ability of stocks to avoid big losses despite negative news such as disappointing sales from Apple Computer ( AAPL) or the scandal surrounding Refco ( RFX). A tradeable bounce is the forecast, anyway, of several insightful market watchers, including investment guru Woody Dorsey, the founder of Market Semiotics, as mentioned
here Wednesday. On Friday, the Dow Jones Industrial Average finished up 70.75 points, or 0.69% at 10,287.34, just shy of its intraday high at 10,291. The blue-chip average was lifted among others by General Electrics ( GE), which posted solid earnings before the market opened. General Motors ( GM) also gained after reports that it may unilaterally cut employee benefits. The S&P 500 finished up 9.73 points, or 0.8% at 1186.57, just under an earlier high of 1187. Most impressively, the Nasdaq Composite rose 17.61 points, or 0.9% at 2064.83, fractionally below its intraday high of 2064.95. Breadth clearly turned positive, with advancing issues beating declining ones 2 to 1 on both the New York Stock Exchange, where 1.4 billion shares traded, and on the Nasdaq, where 1.3 billion shares exchanged hands.
Thanks to the Friday gain, the week's losses were minor for the Dow, which dropped 5 points, or 0.05%. The S&P, however, still dropped 0.5% for the week. The biggest loss was for the Nasdaq, which dipped 1.1% this week. This brings the October losses so far to a 2.7% drop for the Dow, a 3.4% drop for the S&P, and a 4% drop for the Nasdaq. But supporting the case of a sustainable rebound, key sectors such as energy, homebuilders and technology all moved up on Friday, even though the news wasn't necessarily in their favor. Energy shares, for one, gained even as the price of crude oil fell 43 cents to $62.65 per barrel. The Amex Oil Index, after losing 3.5% from Monday's open through Thursday's close, advanced 0.6%, led by strong gains in the likes of Amerada Hess ( AHC), ConocoPhilips ( COP) and Kerr McGee ( KMG). Crude fell in part because of concerns over the fate of commodities brokerage Refco, which shuttered its offshore unit and diminished the business of its U.S. brokerage of its brokerage unit after an accounting scandal raised major questions about the firm's ability to stay afloat. (The TheStreet.com's Matt Goldstein has
closely followed the Refco saga.) In another counterintuitive move, shares of homebuilders advanced even as the yield of the 10-year Treasury bond, which is used to benchmark mortgage rates, rose above 4.50% Friday, before settling at 4.49%. The Philadelphia Housing Sector Index rose 1% Friday, after losing 4% in the four sessions through Thursday's close. Pulte Home ( PHM), Ryland ( RYL) and Temple Island ( TIN) led the gains. Most telling, perhaps, seems to be a turnaround in technology shares, which began Thursday, when the Nasdaq managed to rise 0.5% after losing 2.4% in the first three sessions of the week.
The potential climax of negative sentiment was seen Wednesday, when the tech-heavy index lost 1.15% after Apple's quarterly sales came in below market expectations. Apple shares lost 4.5% on Wednesday, even as CEO Steve Jobs announced the launch of new iPod models with video capacity. But Apple rebounded 9% on Thursday. According to Marc Pado, market strategist at Cantor Fitzgerald, the Nasdaq action on Friday and of the broader market on Friday may have marked the choppy beginning of a bottoming-out process to be followed by "a nice bounce into November." He expects a clearer rebound to take place next week when a slew of key earnings reports are expected. "People have been discounting that the fourth quarter is not going to be as strong as previously expected," Pado says. "If we get not-so-robust results from Intel ( INTC) or an IBM ( IBM), and we first see them dip but then finish the day higher, then you'll know that the bad news is already
priced in." Similarly, all the fear about energy prices hitting consumers and growth might have been prematurely priced in. True, consumer confidence fell further in October, according to the University of Michigan's survey released Friday. But while it plunged in September, retail sales, also released Friday, remained quite firm. "It's human nature," Pado says. "People are expecting to have higher costs this winter but are they going to cut spending until they actually receive the bill? I don't think so." By January of February, when the checks have to be written to pay for energy costs, it will be a different story. That's also partly why Pado, just like Dorsey and other strategists, doesn't believe there's going to be a year-end rally after the upcoming bounce runs its course. In other words, enjoy it while it lasts.