Stocks find a bounce at the finish

NEW YORK (CNNMoney.com) -- Stocks staged a late-session rally to finish modestly higher Friday, even as troubling news from the financial sector kept stocks in the red for most of the day.

The Dow Jones industrial average (Charts) finished 27 points, or 0.2 percent, higher after falling by as much as 121 points earlier in the day.

The broader S&P 500 index (Charts) rose about 0.1 percent, while the tech-laden Nasdaq (Charts) climbed nearly 0.6 percent.

After enjoying an initial bounce on a better-than-expected employment report, stocks quickly slipped into the red on more troubling news from the financial sector for most of the day.

The Wall Street Journal reported Friday that No. 1 U.S. brokerage firm Merrill Lynch (Charts, Fortune 500) engaged in deals with hedge funds that may have been aimed at delaying the recognition of losses on its subprime mortgage investments.

In a statement, Merrill said it had "no reason to believe that any such inappropriate transactions occurred. Such transactions would clearly violate Merrill Lynch policy."

Also weighing on Merrill shares were comments from Deutsche Bank analyst Michael Mayo, who downgraded his rating of the company's stock and estimated that Merrill would suffer an additional $4 billion in writedowns in the coming quarter due to risky investments on mortgage securities.

All told, Mayo said he anticipated another $10 billion in writedowns in the fourth quarter, but some investors worry that because the value of many of these toxic mortgage-backed securities has not been determined, financial firms may have to take additional losses in the coming months, said Alan Lancz, money manager and editor of Lancz Letter.

"I still think that there is another shoe to drop," said Lancz. "Because of that, uncertainty is going to keep a cloud over the market."

Other major financial players, such as Goldman Sachs (Charts, Fortune 500), Morgan Stanley (Charts, Fortune 500) and JPMorgan Chase (Charts, Fortune 500), fell sharply - while the AMEX securities broker/dealer index (Charts) slipped 2.5 percent.

Those same fears, which were sparked by an analyst downgrade of banking giant Citigroup (Charts, Fortune 500), sent stocks sharply lower Thursday with the Dow industrials falling 362 points - its fourth biggest decline of the year.

In related news, the Journal reported late Friday that Citigroup board members were gathering for an emergency meeting this weekend, where they could discuss further writedowns.

With the financials facing the possibility of further losses, Wall Street found it difficult to cheer the upbeat October employment report.

The reading said the economy added 166,000 jobs, more than double what was originally forecast, while the unemployment rate held steady at 4.7 percent.

Both economists and Wall Street were closely watching the report for any signs whether this summer's mortgage crisis had spilled over to the broader economy.

Commodity markets saw the price of gold and oil climb to new highs.

Oil prices finished at a record close Friday, as light, sweet crude for December delivery settled at $95.93 a barrel, up $2.44 from Thursday's close. Earlier in the session, oil prices hit an intraday high of $96.00.

Gold prices reached its highest level in 28-years, as COMEX gold for December climbed $14.80 to $808.50 an ounce.

On the corporate front, Chevron (Charts, Fortune 500) said its quarterly earnings tumbled 26 percent - more than Wall Street had expected - due to tighter refining margins.

Media conglomerate Viacom (Charts) booked better-than-expected results, the company said Friday, helped by the sale of its music publishing business. Viacom shares gained 2.8 percent on the New York Stock Exchange.

Viacom's former corporate sibling CBS (Charts, Fortune 500) posted a better-than-expected gain in earnings after the close Thursday, but its shares slipped after the Writers Guild said that its members would strike the nation's television networks.

Market breadth was negative. Losers edged out winners on the New York Stock Exchange on volume of 1.71 billion. Decliners barely beat advancers on the Nasdaq as 2.46 billion shares traded hands.

Treasury prices gained, lowering the yield on the benchmark 10-year note to 4.32 percent from 4.36 percent late Thursday.

The dollar retreated against the euro but was higher versus the yen.

After digesting a flurry of economic readings, more bad news from the financial sector and the two-day Federal Reserve meeting, Wall Street should face a much slower week next week.

Thursday's chain store sales and Friday's international trade reading should garner most of investors' attention, while Wall Street will also be paying close attention to comments to be delivered Thursday by Federal Reserve Chairman Ben Bernanke.