The Dicey Calculus of Where Stocks Go From Here

Buyers finally filled the breach Friday, allowing stocks to end a dismal week on a positive note. The Dow enjoyed a triple-digit gain for a change, led by a relief rally in financial stcks following the Senate's passage of sweeping financial regulatory reform and a declining dollar.

All 10 sectors of the S&P 500 finished in the green a day after the market suffered its worst one-day plunge in more than a year, which threw stocks into official correction territory, or a drop of at least 10% from their most recent high.

The blue-chip Dow Jones Industrial Average ($INDU) added 125 points, or 1.3%, to finish at 10,193, while the broader S&P 500 ($INX) rose 16 points, or 1.5%, to 1,088. The tech-heavy Nasdaq Composite ($COMPX) gained 25 points, or 1.1%, to close at 2,229.

Wicked volatility has been the norm ever since the European Union unveiled its trillion-dollar shock-and-awe rescue package two weeks ago. But as the market recalibrates itself in wake of Europe's version of TARP, uneasy investors might find some solace in the fact that the U.S. bailout stirred up much the same action at that time before stocks moved decisively into rally mode, says John Stoltzfus, market strategist at Ticonderoga Securities.



"We continue to recall that the period immediately post the establishment of TARP was not a period of upside and celebration but rather a period of downside on uncertainty as to what effect TARP and stimulus would have on the economy and the markets," wrote Stoltzfus in a Friday note to clients. "Repricing of asset classes into a market correction has never been a comfortable experience. Inevitably, however, from the rearview mirror of history, such a scenario is riddled with opportunities, not just risk."

Although European debt fears are likely overblown, recent U.S. economic data and tepid corporate outlooks could be undermining analysts' forward earnings estimates, says DailyFinance financial writer Vishesh Kumar, throwing year-end price targets into question.

"The situation in Europe is sort of the sword of Damocles's hanging over the market right now," Kumar says. "But U.S. leading indicators are pointing down for the first time since 2009, jobless claims are still up there and companies like Cisco (CSCO) and Lowe's (LOW) didn't have the guidance that analysts were expecting."

That's why traders are struggling to determine whether the market might have gotten ahead of itself -- not just in light of what's happening overseas but also here at home.