Friday's for Profit-Taking

Stocks finished lower on Friday, though up nicely for the week, as investors took a sour view of Bank of America's (BAC) poor 3rd quarter performance and punished Dow component IBM for missing revenue targets, even though the company beat EPS estimates.

The drop-off was dramatic right at the opening bell, with the major averages hitting their lows for the day within the first two hours of trading. Much of the action had to do with options expiration, and, sure enough, the afternoon session saw stocks gain strength, hitting their highs with about 20 minutes left in the session.

Though the major averages were down anywhere from 1-1.7% during the day, they finished at higher levels, keeping the stock market's winning week intact.

Dow 9,995.91, -67.03 (0.67%)
NASDAQ 2,156.80, -16.49 (0.76%)
S&P 500 1,087.68, -8.88 (0.81%)
NYSE Composite 7,133.96, -70.09 (0.97%)

Declining issued outpaced advancers, 4283-2136 (nearly 2-1), the widest disparity between losers and winners of the week. New highs remained better than new lows, 363-45. Volume was in line with the previous 3 days and most of the past few months. There was nothing surprising at all about the downturn. Stocks have been on a tear to the upside since March, and occasional pauses are expected and healthy. Investing is all about profits, and Fridays are usually good days on which to take them, as many obviously did.

NYSE Volume 5,708,362,000
NASDAQ Volume 2,237,903,750

Oil reached a new 2009 high, gaining 95 cents, to $78.53. Gold stopped its temporary slide, gaining 90 cents, to $1,051.50, and silver added a penny to its price, at $17.42. With oil taking the lead late this week, the price above $78 is signaling a potential top. There still is inadequate demand to command prices over $80, a level at which the market may balk. Those promoting an oil bull have not considered the overall implications of higher oil and gasoline prices on the global economy, nor have they taken into account the impact of alternative fuels, which continues to tamp down demand slightly, but with more force every day.

Commodities have had a nice run, but the potential for overpricing is evident. There's no rationale behind the move in gold and silver except for the prospect of inflation, which has yet to appear. Maybe nine months from now, or 18, but certainly, there is no inflation present in the economy anywhere. Stable prices should be considered a positive for recovery, though the supply-siders want and actually need inflation to verify their outlooks. Whether or not there will be further upside in commodities (read: dollar weakness) is uncertain and maybe even unlikely. The dollar may have already bottomed.

While the markets continue to grind higher, a couple of trends have developed. First, the chorus calling for a 10-15% correction continues to chirp, though their analysis fails to comprehend the enormity of the rally and the strength of the virtuous cycle which has developed. Despite some $3 trillion still sitting in money market funds and not being put to work in equities, those holding that sidelined money are hoping for the worst in earnings reports, the volume of which will increase dramatically over the upcoming two weeks.

Sadly, those waiting for an entry point may have had their best opportunity on Friday, as more than 3/2rd of companies reporting thus far have beaten estimates, and some, like Google, Intel and JP Morgan Chase, have beaten them by country miles. There will surely be weak hands and weak reports issued, but they're more than likely to be drowned out by the bullish drumbeat of companies which report better-than-expected earnings for the quarter.

That virtuous cycle, of investments making money, turning profits and investors moving from stock to stock and sector to sector keeps the indices churning higher. The pernicious cat-calls from those outside the Wall Street money machine, decrying everything from pure profits to executive compensation as evil, have just plain missed the boat and are likely drowning in debt.

The moans and screams from "Main Street" (which, incidentally, is holding its own) are mostly tied to the employment picture, which continues to flatten out, despite the largely anecdotal references cited by the doom-and-gloom crowd.Certain areas of the country are doing better than others, which is absolutely normal, as is the trend of certain industries now hiring while others continue to bleed jobs.

Eventually, jobs will find people, though the government, at all levels, continues to pamper job-losers with extended benefits, mortgage workouts and various other stimuli. Not surprisingly, state and local governments have had their hands out to the feds the longest, and still continue to run deficits, resist downsizing and tax reductions, even in the face of the next wave of job stress, right in their own wheelhouses.

Federal, state and local governments have weathered the financial crisis without shedding even a small percentage of what the private sector has endured, and as companies begin to hire (some already say they cannot fill jobs), expect these spendthrift government bodies to begin mass layoffs which should have occurred months ago. They are the reason the unemployment rate will remain high for some time. Even though the private sector will be thriving, the freeloading public employees will face cuts, layoffs and terminations in months ahead.

Meanwhile, stocks will continue higher until the really late and really stupid money enters the market, flooding the bourses with fresh cash as longer-term investors exit, producing a market top within the next 3-6 months and slamming the door on the rally in the short run. What to look for in the coming months, after earnings over the next two weeks (a period which will probably produce a small upside), is a series of smaller and smaller rallies, first in early November (followed by a lull through Thanksgiving into the first two weeks of December), a Santa Claus rally, a small Janaury run and then a serious lull in which everybody will be calling it a "stock picker's market" in which only the best companies will continue to rise.

Stocks will get a boost from 3rd quarter GDP, which is expected to show the first quarterly growth in a year, and, surprisingly, from October and November jobs data. There is a high degree of probability that September's poor employment picture was more of an aberration than a trend-starter.

The next two weeks seem almost certain to produce profits in many stocks, even though trading may be choppy and jittery. The wall of worry that the markets must climb gets even more worrisome near the top, and we are getting close to nose-bleed territory. Before the year is out, however, expect the Dow to close in on 10,750-11,000 and the S&P 500 to reach for 1200.