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Stocks Log Best Week of 2010 as Fed Shock Fades

Stocks eked out a gain Friday as the initial shock of the Fed's surprise move to raise the discount rate wore off.

The Dow Jones Industrial Average gained about 10 points, or 0.1 percent, closing above 10,400. After a four-day winning streak, the Dow gained 3 percent for the week, its best performance of 2010.

The CBOE volatility indexfinished around the key 20 mark, though this is an options expiration day which adds to volatility.

The dollar rose against both the euro and yen.Oil settled above $79 a barrel.Gold rose $1,122.10 an ounce.

Financials and industrials were the best-performing sectors this week. Tech and health care were the biggest decliners.

Financials were mostly higher today after Morgan Stanley recommended buying banks including New York Mellon, Northern Trust , PNC and Wells Fargo .

"If this group trades down because investors assume that rising rates for the bank group is a negative, we strongly recommend investors buy,'' Morgan Stanley analysts wrote in a note. "The discount window rate hike signals rising confidence in the recovery."

Morgan Stanley also likes JPMorgan, but the stock fell.

Among the Dow's top industrials were Boeing and DuPont . In fact, Boeing had the most positive impact on the Dow this week, up 7 percent.

Kraft had the most negative impact on the Dow, down about half a percent this week.

After the bell Thursday, the Fed raised the discount rate, the rate it charges banks to borrow money, by a quarter of a percentage point to 0.75 percent. Though the Fed had signaled that such a move was on the horizon, few expected it this soon.

“I'm shocked. Completely shocked,” Todd Schoenberger, managing director of LandColt Trading said of the Fed’s move, adding that he thinks it means the Fed will raise the federal-funds rate, the rate banks charge each other and which sets broader tone for interest rates, at its next meeting in March.

But others said this is merely a technical move, not a symbolic one, and that the Fed isn't planning to raise the fed-funds rate anytime soon.

The increase in the discount rate "does not mean that the Fed is ready to hike rates or has a set time for such a move. But it does mean that the Fed is preparing the way,” said Robert Brusca, chief economist at FAO Economics. “This is very much a move to prepare markets and to test markets to see if they are ready to absorb a rate increase by putting the Fed’s lending vehicles back in a normal configuration,” he said.

Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said he thinks the Fed will keep the fed-funds rate on hold through the end of the year.

Federal Reserve officials have been quick to say that the discount rate hike is in no way meant to signal a rise in the fed-funds rate.

When do you think the Fed will raise the federal-funds rate? Take our poll.

One theory had been that the Fed made the move after the bell Thursday because there might be a surprise spike in inflation in todays' CPI report but that didn't happen.

Consumer prices rose just 0.2 percentin January, less than expected, and core CPI, which excludes volatile food and energy components, fell for the first time since 1982.

This came after the Dow staged a three-day winning streakin which it gained nearly 3 percent.

What your post-Fed trading strategy for next week? Click on the video at left.

Tech stocks took a hit as Dell's results after the bell disappointed investors despite beating consensus estimates.

This came after an encouraging read on the PC market from Hewlett-Packard's earnings.

CBS mhit its earnings target and revenue topped forecasts.

After a pair of potential deals this week — one among mall operators and the other among drugstore chains — there was more M&A news today: Schlumberger is apparently in advanced talks to buy Smith International, the Wall Street Journal reports.

Volume continued to be light, with just 7.35 billion shares traded on the three major exchanges. Advancers outpaced decliners on the big board, about 7 to 5.

Toyota shares ticked higher after CEO Akio Toyoda's agreed to agreed to testify in Washington.

Next week, the market will be watching congressional testimony from Fed chief Bernanke, plus that Toyota hearing and an Obama business roundtable. On the economic front, we'll get readings on consumer confidence, home sales and GDP. The earnings calendar is all about retail, with reports from Macy's, Sears, Gap and Home Depot, among others.

On Tap for Next Week:

MONDAY: Fed's Yellen speaks; Earnings from Campbell's Soup, Lowe's, Nordstrom and RadioShack
TUESDAY: Case-Shiller home-price index; consumer confidence; Peter Madoff hearing; Toyota recall hearing; two-year note auction; Fed's Bullard speaks; Earnings from Home Depot, garmin, Macy's, Sears, and Target
WEDNESDAY: New-home sales; Bernanke testifies; Toyota hearing; Obama business roundtable; five-year note auction; Earnings from Dollar Tree and Toll Brothers
THURSDAY: Weekly jobless claims; durable-goods orders; Bernanke testifies; Fed's Pinalto, Bullard speak; Apple shareholder meeting; Buffett lunch; health-care summit; seven-year auction; financial-industry compensation hearing; Earnings from Kohl's, Liberty Media and Gap
FRIDAY: 2nd read on Q4 GDP; consumer sentiment; existing-home sales; Fed's Kocherlakota speaks; Madoff hearing; Earnings from Berkshire Hathaway

Send comments to cindy.perman@nbcuni.com.