March 17 (Bloomberg) -- U.S. stocks advanced, erasing more than half the loss in the Standard & Poor’s 500 Index since President Barack Obama took office, on an unexpected rebound in homebuilding and speculation that the Federal Reserve will outline plans to bolster the economy.

Citigroup Inc. and JPMorgan Chase & Co. rose at least 7.7 percent as the KBW Bank Index extended its gain since March 6 to 46 percent. KB Home, the fourth-largest U.S. homebuilder, rallied 9.3 percent and Home Depot Inc. rose 6.7 percent as housing starts unexpectedly climbed 22 percent in February, the most since 1990. Apple Inc. added 4.4 percent to help lead technology shares higher after updating its iPhone software.

The S&P 500 increased 3.2 percent to 778.12, led by a 6.6 percent gain in financial companies. The Dow Jones Industrial Average advanced 178.73 points, or 2.5 percent, to 7,395.7. The Nasdaq Composite Index surged 4.1 percent. About eight stocks rose for each that fell on the New York Stock Exchange.

“The market was depressed to an extreme level because of the constant stream of bad news and events,” said Mark Freeman, a money manager at Westwood Management Corp. in Dallas, which oversees $7 billion. “The mere fact that the negative news has stopped allows the market to come back up to a reasonable level.”

The S&P 500 has rebounded 15 percent from a 12-year low on March 9, erasing 58 percent of its slump since Obama’s Jan. 20 inauguration. The gains were triggered by optimism that the worst of the financial crisis was over after Citigroup, Bank of America Corp. and JPMorgan said they were profitable in the first two months of the year.

14 Percent Slump

The S&P 500 is still down 14 percent in 2009 as mounting losses at banks raised concern the government would be forced to nationalize some lenders. The index lost 38 percent in 2008, its worst year since the Great Depression.

The 17-month U.S. stock market decline may be at or near an end after investors exhausted their will to sell, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup.

“We are seeing many of the classic signs of a capitulation,” Levkovich said in an interview with Bloomberg Radio.

Today’s advance came amid speculation that Fed policy makers will consider increasing the pace and size of a $600 billion program to purchase mortgage securities and other assets. That would signal a more aggressive stance from Fed Chairman Ben Bernanke after the economy and job market deteriorated further since the Federal Open Market Committee last met, analysts and investors say. The FOMC is expected to release a statement tomorrow afternoon.

‘Optimism Building’

“Bernanke has been cheerleading the economy so there could be some optimism building around his comments tomorrow,” said Eric Bjorgen, a portfolio manager at Leuthold Group, which oversees $3.2 billion.

JPMorgan rose the most in the Dow, climbing 8.9 percent to $25.14. Citigroup Inc. added 7.7 percent to $2.51, extending its rebound from a March 5 closing low to 146 percent. The stock is still down 63 percent this year.

Centex gained 56 cents, or 8.1 percent, to $7.45 today and an S&P gauge of 13 homebuilders added 6.4 percent. Work began on 583,000 homes at an annual rate in February, topping the 450,000 projected by economists in a Bloomberg survey, the Commerce Department said. The jump was influenced by warmer weather and an 82 percent surge in starts on condominiums, apartments and townhouses.

Home Depot Climbs

Home Depot had the Dow’s third-biggest advance, adding 6.7 percent to $21.48. The largest home-improvement retailer was raised to “buy” from “hold” at Jefferies & Co., which cited market share gains.

Apple added 4.4 percent to $99.66 and the S&P 500 Information Technology Index jumped 3.9 percent.

Cisco Systems Inc. gained 4.5 percent to $16.14. Goldman Sachs Group Inc. added the world’s largest maker of networking equipment to its “conviction buy” list, citing the introduction of its so-called blade platform.

Target Corp. rose 5.6 percent to $30.45. The second-largest U.S. retailer was raised to “buy” at Jefferies Group Inc. Kohl’s Corp., which also was boosted to that rating, advanced 6.2 percent to $39.70.

Genworth Financial Inc. and Hartford Financial Services Group Inc. helped lead insurance companies higher after state regulators said a major insurer’s failure will not jeopardize the entire industry.

‘Systemic Risk’

“Even a major insurer failure, while traumatic in terms of job displacement and, perhaps, for shareholders, will generally not impose systemic risk,” Michael McRaith, director of insurance for Illinois, said in prepared testimony to the Senate Banking Committee on behalf of the National Association of Insurance Commissioners.

Genworth climbed 20 cents, or 14 percent, to $1.64 and Hartford advanced 58 cents, or 8.9 percent, to $7.13.

Financial shares in the S&P 500 added 6.6 percent for the steepest advance among 10 industries. The group dropped as much as 2.2 percent in the first half hour after analyst Meredith Whitney told CNBC that banks’ profit forecasts “may come back to haunt them” because they probably don’t include writedowns on bad assets and provisions for loan losses.

Bank of America Chief Executive Officer Kenneth Lewis said on March 13 that his company was profitable in January and February, joining JPMorgan and Citigroup in suggesting the nation’s three biggest banks are recovering from the credit crisis.

The announcements last week helped spark a record rally in financial shares. The S&P 500 Financials Index surged 34 percent last week, the steepest advance since S&P created the gauge of banks, insurers and investment companies in 1989.

Alcoa, Nucor Drop

Alcoa Inc. led the market lower in early trading after the largest U.S. aluminum company cut its dividend and said it will sell stock to raise cash. The shares slid 53 cents, or 8.7 percent, to $5.59.

Nucor Corp., the largest steelmaker by market value, fell $3.40, or 9.2 percent, to $33.55 after forecasting a first- quarter loss of as much as 65 cents a share because of lower- than-expected demand.

LaBranche & Co. tumbled 23 percent to $4.60. The fourth- largest market maker at the New York Stock Exchange said it expects to post a loss in the first quarter because of “extremely poor market conditions” and the departure of its head of options market making.

To contact the reporter on this story: Cristina Alesci in New York at calesci2@bloomberg.net;

Last Updated: March 17, 2009 16:44 EDT