A Funny Thing Happened on the Way to a Sell-Off

As improbable as it seemed before the opening bell, the major averages didn't crater Friday, as some more solid corporate earnings and a dovish reading on inflation helped offset a surprise policy change by the Federal Reserve.

By all indications, U.S. equities should have closed the week with a pounding. After all, the Fed popped off quite the surprise late Thursday when it raised the rate it charges on short-term loans to banks (called the discount rate). Naturally, the speculators responded immediately, scurrying away from stock-index futures and overseas equities like cockroaches caught in the light.And yet U.S. shares remained stalwart for the day and posted gains for a second straight week, bolstering confidence that the too-close-to-a-correction slide from the Jan. 19 market top has run its technical course.

The blue-chip Dow Jones Industrial Average ($INDU) was up 9 points, or 0.1%, at 10,402, while the broader S&P 500 ($INX) gained 2 points, or 0.2%, to 1,109. The tech-heavy Nasdaq Composite ($COMPX) rose 2 points, or 0.1%, to finish at 2,244.

Saved by the Inflation Report

Heaven knows, between relief over maneuvering to deal with the Greek debt tragedy and the Fed's Thursday move to normalize the overnight lending markets, well, sheesh, there's enough to chew on for bulls and bears alike.

No one really understands why the market does anything on any given day or week or month (or possibly ever). Perhaps traders actually read the Fed statement accompanying its discount rate hike. "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the central bank said. Or maybe the speculators just took the Fed at its word.

Either way, just as stocks looked set to fall at the open, it seems a Labor Department report saved the session. Why, there's no inflation to see here, ladies and gentleman, at least according to January's consumer price index. The Fed can't possibly hike rates with inflation so low.

Er, just like it said in its statement.

Risk Is OK Again

At any rate, it was also nice for the bulls to see J.C. Penney (JCP), a bellwether middle-market retailer, get some love from the Street after posting quarterly results Friday. Despite the company's weak outlook for 2010, shares in Penney's rallied and the green spread out to other retail stocks. True, a slew of retailers are slated to report earnings soon, so it's only natural that speculators would "buy the rumor" now "to sell the news" later.

But, importantly, it's also a boost of confidence to bulls that the risk trade ("you're buying consumer discretionary stocks?") is back on. At least, it seems, for now.
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