Jan. 8 (Bloomberg) -- Most U.S. stocks gained as an advance in energy shares and Citigroup Inc.’s agreement to allow some homeowners to avoid foreclosure helped the market erase an early slide spurred by a worsening earnings outlook at retailers.

Citigroup erased a 2.4 percent decline after agreeing to support legislation that lets bankruptcy courts reset mortgage rates for borrowers at risk of losing their homes. Tesoro Corp. jumped 6.7 percent to lead gains in fuel companies as the profit outlook for refiners improved. Wal-Mart Stores Inc. tumbled 7.5 percent and Gap Inc. lost 4.7 percent after saying earnings will trail forecasts.

Almost two stocks advanced for each that fell on the New York Stock Exchange. The Standard & Poor’s 500 Index added 0.3 percent to 909.73 after slumping 3 percent yesterday and 1.1 percent this morning. The Dow Jones Industrial Average fell 27.24 points, or 0.3 percent, to 8,742.46, with Wal-Mart posting the biggest drop.

“The market took the Wal-Mart numbers and retail reports in fairly decent stride today,” said Frederic Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “After yesterday’s 3 percent correction, I think we’re seeing a little big of bargain hunting and traders are sitting on their hands waiting for the job report tomorrow.”

Retailers led the market lower in early trading as the disappointing forecasts from Wal-Mart and Gap, as well as Limited Brands Inc. and Macy’s Inc., spurred concern the profit slump deepened as the recession forced consumers to rein in holiday spending. The five-quarter decline in earnings at S&P 500 companies is projected to stretch into two full years, according to analyst estimates compiled by Bloomberg.

Jobs Concern

The early declines also came as the government said continuing jobless claims surged to 4.6 million last week even as initial claims unexpectedly fell. The government may report tomorrow the economy lost another 510,000 jobs in December, bringing the 2008 total to a six-decade high of 2.4 million, according to economists surveyed by Bloomberg. The unemployment rate probably jumped to 7 percent, the highest level since 1993.

President-elect Barack Obama warned in a speech in Fairfax, Virginia, that the U.S. risks sinking deeper into an economic crisis without an infusion of government spending and urged Congress to act quickly on his $775 billion stimulus package.

The S&P 500 has slumped 38 percent since the start of 2008 amid more than $1 trillion in credit losses and writedowns at financial firms worldwide and the first simultaneous recessions in the U.S., Europe and Japan since World War II. The benchmark index for U.S. equities is up 0.7 percent in 2009 after posting its worst yearly loss since 1937.

Refining Gains

Tesoro, the largest oil refiner in the U.S. West, rallied 6.7 percent to $14.92. Valero, the nation’s biggest refiner, climbed 3.9 percent.

The gains in fuel processors came after yesterday’s 12 percent plunge in crude oil and today’s 0.9 percent drop boosted potential profits for companies that refine oil into gasoline and other fuels. The so-called crack spread, a measure of refining profitability, jumped 10 percent today and has climbed 88 percent since the end of 2008, according to Bloomberg data.

The S&P 500 Energy Index rose 1.2 percent, the steepest advance among 10 industries.

Citigroup erased a 2.4 percent decline to close up 1 cent at $7.16. The S&P 500 Financials Index pared a 1.7 percent tumble to 0.2 percent.

Senators Christopher Dodd of Connecticut, Chuck Schumer of New York and Richard Durbin of Illinois praised Citigroup for the agreement to revise legislation that failed last year. Citigroup supported the legislation that will apply only to existing mortgages.

‘Environment for Negotiation’

“The notion here is to create the environment for negotiation so that those who are holding the mortgages will not wait until bankruptcy,” Durbin said at a Washington news conference. “The current efforts, as good as they may, be have not resulted in a dramatic change or reduction in the number of mortgage foreclosures.”

Sears Holdings Corp. surged 23 percent to $49.98 for the biggest gain in five years and best advance in the S&P 500. The largest U.S. department-store chain said it expects fourth- quarter earnings per share, excluding items, of $2.44 to $3.09, above the consensus estimate of $1.92.

Whole Foods Market Inc. had the second-biggest gain in the S&P 500, rising almost 23 percent to $12.27 after Ron Burkle’s private-equity firm Yucaipa Cos. LLC said it has accumulated a 7 percent stake in the supermarket operator.

GameStop Corp. climbed 13 percent to $25.58. The world’s largest video-game retailer boosted the low end of its fourth- quarter forecast and now predicts earnings of $1.31 to $1.34 a share.

Thinkorswim, Qwest

Thinkorswim Group Inc. rallied 48 percent to $8.34. TD Ameritrade Holding Corp., the No. 3 U.S. online brokerage by assets, agreed to acquire the online brokerage and investor education company in a cash and stock deal valued at about $606 million. The offer values Thinkorswim at $8.71 a share, 54 percent higher than yesterday’s close.

Qwest Communications International Inc. rose 13 percent to $4.04. The third-largest local phone company in the U.S. said all its divisions performed as it expected in the fourth quarter, after curbing costs to offset slowing demand.

Wal-Mart, whose shares climbed 18 percent last year for the best gain in the Dow, slid $4.16 to $51.38 today for the stock’s steepest loss in almost three months. The retailer cut its fourth-quarter earnings forecast and said January revenue may be little changed after customers balked at discounts on flat-panel televisions, $7.50 jeans and microwave ovens for $43.

‘Beat Up’

“Over the last 10 years, Wal-Mart has become a kind of hero, or Teflon, stock and to see it get beat up like everyone is disillusioning to investors,” said Jonathan Vyorst, senior vice president at New York-based Paradigm Capital Management Inc., which oversees about $1.3 billion.

Macy’s and Gap also lowered their earnings forecasts as the worst holiday-shopping season in 40 years squeezed retail profit margins. Macy’s fell 3.4 percent to $10.93, while Gap lost 4.7 percent to $12.92.

Limited slumped 6.5 percent to $10. December sales fell 10 percent and the retailer slashed its fourth-quarter profit projection to as little as 55 cents a share from a previous range of 85 cents to $1.

Wal-Mart led a group of consumer-staples companies including tobacco producers, food companies and makers of household goods in the S&P 500 to a fourth daily slump, falling 1.3 percent collectively. The group was last year’s best performing industry in the index with an 18 percent drop.

S&P 500 retailers will likely say profits decreased 32 percent in the fourth-quarter and 20 percent in the current quarter, according to analysts polled by Bloomberg.

Profit Estimates

Earnings at S&P 500 companies have fallen for five straight quarters, matching the longest streaks of declines on record, and the slump is forecast to continue. According to estimates compiled by Bloomberg, profits probably decreased 12 percent last quarter and will drop 11 percent in the first quarter and 6.2 percent in the following three months before rebounding in the second half of the year.

Sun Microsystems Inc. sank 8.3 percent to $4.67, the most since Dec. 1. The server maker was added to Goldman Sachs’s Americas “sell” list. The brokerage also lowered its share- price projection and 2009 earnings estimate, citing a “more challenging” first half of 2009 ahead.

VIX Retreats

The VIX, as the Chicago Board Option Exchange Volatility Index is known, retreated 1.9 percent today after surging 13 percent yesterday for its biggest intraday gain since Dec. 1. The gauge measures the cost of insuring against declines in the S&P 500 and is known as Wall Street’s “fear gauge.”

The S&P 500 yesterday slid the most since Dec. 1, erasing most of its 2009 gain, as a private report showed employers cut more jobs than estimated in December and companies from Alcoa Inc. to Intel Corp. spurred concern the profit outlook is worsening. The gauge has rebounded 21 percent from an 11-year low on Nov. 20 on optimism the recession will end this year after the Federal Reserve cut interest rates to as low as zero and Obama proposed the largest infrastructure investment since the 1950s.

The difference between what the U.S. government and banks pay to borrow for three months, the so-called TED Spread, is still about three times higher than before credit markets started freezing in August 2007, according to data compiled by Bloomberg.

The Bank of England cut its benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession. The bank rate was reduced a half-point to 1.5 percent.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

Last Updated: January 8, 2009 16:58 EST