The week's vicious stock market slump set up the perfect buying opportunity for investors, who finally received their long-awaited market correction.
Whether Friday's rally lasts is anybody's guess, as European Union turmoil continues and Wall Street worries over the impact of new financial regulationsand weakness in some key economic yardsticks. The rally actually faltered in the last hour of Friday's trading but then recovered to close higher.
But for most of the day at least, investors regained their bearingsand used the selloff, which ventured into correction territory Thursday before coming back the day after, as a chance to reconfigure their portfolios.
"What people forget is this is only like 9 percent. You start talking to people, you'd think we were down 35 percent from the high," says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "The reality is when you take a look at what's going on in our market domestically, we're in great shape."
Why? "Earnings are good, companies are sitting on piles of cash, they're buying back stocks, increasing dividends, mergers and acquisitions are moving up again," Baum explained. "Those are the realities and are healthy factors for great stocks and great companies, and the market's going higher."
Baum's buoyant attitude about the market seemed to be catching, as an options expiration day and clarity about regulatory reform helped squelch the dour mood that took hold in May and sent the major averages 10 percent from their highs—the threshold generally used for an official correction.
Financials led the way, in fact, while consumer discretionary and materials stocks also were powerfully higher.
Investors were treating the rally as a way to step away from the extreme caution of the three previous trading days and to step out a bit into stocks.
"The abyss is over. We're not going back to 6300" on the Dow, Baum says. "You have to use these times if you're going to be a stock market investor. If you're in the game for five to seven to 10 years, you have to take advantage of price weakness and use this time to build positions."
Baum is a big fan of quality large-caps, and he says he uses times like these to add companies such as Apple, Verizon and Pfizer. He also bought Google for his personal account.
In addition, he says credit card companies like MasterCard and Visa are great buys.
Other market pros agree.
"We sold an international position that hadn't been doing particularly well and we bought Visa off news of the finance bill," says David Twibell, president of wealth management for Colorado Capital Bank in Denver.,
Twibell remains cautious about the state of the market but used the pullback to shed some weak positions and fortify with companies that have stronger valuation. But he also is avoiding Europe and essentially playing defense until it becomes clearer about whether Friday's rally has legs.
"The jury's still out on that," he says. "The rally that comes out of this is going to be a very different type of rally and we're going to see rotation into areas that look a little safer such as dividend-paying stocks."
Others tried to capitalize on the increased volatility and volume in the market to make money.
Stock volume on Thursday hit its highest level in a decade, and Friday's trading followed suit.
Consequently, Credit Suisse raised its outlook by 6 percent on the stock exchanges, particularly on the NYSE Euronext and CME Group, which runs the Chicago Mercantile Exchange.
"Heightened macroeconomic concerns and uncertainty surrounding US financial services firms have both contributed to a sharp surge in volatility over recent weeks, best evidenced by the May 6th 'Flash Crash,'" Credit Suisse said in a note to clients. "Amid the chaos, we view the financial exchanges as safer ports in the storm with healthy and improving core fundamentals."
Investment bank FBR Capital Markets in Arlington, Va., said what looks to emerge from financial reform should be good for banks, as more stringent earlier proposals were mostly excised from the bill negotiated in Congress.
A deal over the bill added a much-needed level of certainty to calm market fears.
"We expect the banks and broker/dealers to react positively on the news as some of the most onerous amendments were not included in the bill," FBR told clients. "However this is not the end to headline risk, as there will be much speculation in the coming week as to what the final bill will contain."
Indeed, uncertainty was likely to linger, keeping most portfolio managers at least somewhat on edge.
"I'm probably in the camp of (the market will) grind around for a while until we get some clarity," says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. "If all this is is Greece, then who cares? The real uncertainty is what other dominoes are going to fall in Europe. We have to get a lot more clarity on that before the market can go back up."
As such, Tuttle used the pullback to add to small-cap companies on the Russell 2000, as well as real estate investment trusts and regional banks.
"At the end of the day you look at our economy, it's still humming along. Where do you put your money? Do I want to put my money in a two-year Treasury? No," Tuttle says. "You have to put it somewhere. I think people at some point will be forced to put their money back in the stock market."