Techs, Financials Lead Stock Rally

The Nasdaq jumped 2.8%. Financial issues were lifted by news that Kuwait could boost its stakes in Merrill Lynch and Citigroup.

This time it was May, not March, that came in like a lion.

Major stock indexes rallied on Thursday, led by technology issues. The tech-heavy Nasdaq composite index handily outperforming its blue-chip brethren.

Investors were cheered by a raft of moderately better economic data and lower oil prices, which could bring some relief to consumers and help speed an economic rebound. The dollar index rallied, buoyed by an upturn in bond yields, which in turn pressured crude oil and gold prices.

After a slow start, trading accelerated, although the market is bracing for Friday's U.S. employment report that is expected to show a drop of 50,000 in nonfarm payrolls.

Helping drive the rally was a jump in financials, reacting to remarks by the managing director of the Kuwait Investment Authority on Bloomberg Television that the fund may boost its stakes in Merrill Lynch & Co. (MER) and Citigroup (C). Bader Al-Saad expressed "confidence in the management" of the two companies, which have been hurt by subprime mortgage-related losses.

On Thursday, the Dow Jones industrial average finished 189.87 points, or 1.48%, higher at 13,010.00. The broader S&P 500 index rose 23.75 points, or 1.71%, to 1,409.34. The tech-heavy Nasdaq composite index ended up 67.91 points, or 2.81%, at 2,480.71.

The market saw rotations among sectors and asset reallocations, with shares of energy companies and health care outfits falling and technology and retail stocks getting a boost. On the New York Stock Exchange, 22 stocks closed higher for every nine that were lower, while on the Nasdaq the ratio was 19-9 positive, MarketScope said.

Meanwhile, the dollar index was sharply higher, up 0.67 to 73.28, amid growing perception the Fed, which cut rates 25 basis points on Wednesday, is on hold until December. The euro was down at $1.5452 and sterling was off $1.9735.

John Canally, an investment strategist at LPL Financial in Boston, traces the dollar rally back to the Fed's remarks on Wednesday about its monetary easing and liquidity enhancing efforts should help the economy pick up and start to grow at trend rates again in the second half of this year.

The dollar is also being helped by "some weaker data starting to emerge overseas," says Canally. "Some of the subprime issues we faced here late last year are starting to surface in the U.K. and there are weaker inflation numbers in Europe. All those things combined suggest that foreign central banks will have to start cutting rates, while the Fed can stay put here."

Much of the dollar's bounce on Thursday was fueled by speculators scrambling to cover their short positions on fear that their bets against the dollar were overdone, says Peter Cardillo, chief market economist at Avalon Partners in New York.

The rally in the dollar also put pressure on commodity prices, including oil prices, which fell on Thursday, extending a drop from just under the $120 per barrel level on Wednesday on a larger-than-expected 3.8 million barrel increase in crude inventories reported by the Energy Information Administration.

On Thursday, June NYMEX crude fell 94 cents per barrel to close at $112.52. Besides a stronger dollar, traders were also reacting to news that an oil strike in Nigeria had been averted, said S&P MarketScope.

If the trend toward lower energy prices continues, it will help lower gasoline prices, which will relieve some of the pressure on consumers, on top of support they'll get from the tax rebate checks and the cumulative effect of 350 basis points in rate cuts, says LPL’s Canally. "All those things are acting as a tail wind on the dollar," he says.

After subpar economic growth in the last two quarters, the U.S. gross domestic product in the second quarter is likely to be saved by the rebate checks, which could cause the economy to grow 1% instead of contracting 1% as it would have without the fiscal stimulus, says Canally. He predicts that economic growth could return to roughly the long-term average rate of 2.5% by the end of 2008.

From an investment perspective, since the dollar started to firm up in mid-March, market players have been shifting from expectations of outperformance by late cyclical sectors such as materials and energy to bets that early cyclicals like technology and consumer discretionary stocks will be the leaders, Canally notes. "Consumer discretionary often does well in the early part of a cycle," he says.

Although Cardillo feels that investors’ confidence has gotten a boost and that the benchmark index's closing above 13,000 is a positive sign, he sees equity markets probably settling into a trading range rather than embarking on a new bull run.

Despite the more optimistic tone, there's still a debate in the market about a recovery, with some people thinking another big shoe could drop, such as a wave of home foreclosures or a sharp spike in unemployment, or lack of spending by financial firms, which could force the Fed to start cutting interest rates again, Canally says.

Leading Thursday's economic data, initial jobless claims rebounded 35,000 to 380,000 -- the median forecast was 355,000 -- in the week ended Apr. 26. Initial claims have revealed volatile swings over the last two months and this latest gain leaves initial claims back at the highest level since the Easter-distorted 406,000 figure for the week ended March 29, Action Economics said.

Continuing claims jumped 74,000 to 3.02 million after dropping 54,000 the previous week, which leaves the series above the 3.0 million level for the first time since April, 2004.

The Commerce Dept. reported a 0.4% rise in consumer spending in March, twice the gain that economists had predicted. Adjusted for inflation, however, spending was up a much weaker 0.1%, which shows the damaging effect higher gasoline prices are having on consumers.

Construction spending fell 1.1% in March, more than the median estimate of a 0.7% decline, wiping out the 0.4% increase seen in February. This was the fifth consecutive drop in the past six months and was driven by a record 4.6% plunge in spending on housing.

The U.S. ISM manufacturing index held at 48.6 in April, just over the 48.0 that markets had expected. This is the fourth sub-50 reading in the last five months, indicating that manufacturing activity remains in contractionary territory. The employment index slipped to 45.4 from 49.2, while new orders held at 46.5. New export orders climbed further to 57.5 from 56.5. Inventories rose to 48.1 from 44.9. Prices paid rose to 84.5 from 83.5, continuing to indicate inflation in the pipeline.

Among the stocks in the news on Thursday, shares of Exxon Mobil (XOM) dropped 3.6% after the world's biggest publicly-traded oil company posted $2.03 in first-quarter EPS, vs. $1.62 a year ago, on a 34% rise in revenue. Despite the higher profit, Exxon's report of lower refining and chemical margins, lower production volumes and higher operating costs didn't encourage investors.

Home Depot (HD) shares climbed 3.7% after the retailer said it will no longer pursue the opening of about 50 U.S. stores that have been in its new store pipeline, in some cases for more than 10 years. As such, the company said it will record a charge of about $400 million related to capitalized development costs and ongoing obligations associated with those future store locations. Home Depot also said it will close 15 underperforming U.S. stores that do not meet its targeted returns. As result of store closings and impairment, the company will record a charge of about $186 million.

Shares of JDS Uniphase (JDSU) fell 16.1% after the company posted third-quarter non-GAAP EPS of 14 cents, vs. 6 cents one year earlier, on a 6.2% revenue rise. The company sees fourth-quarter revenue of $381-$403 million, with its operating margin in the range of 2%-5%.

Westlake Chemical (WLK) shares fell 9.0% after the company reported first quarter EPS of eight cents per share, vs. 30 cents a year ago, as lower margins resulting from significantly higher feedstock costs offset a 27% revenue gain. The company says it's concerned with the possibility of a recession, which could impact its ability to raise prices sufficiently to offset higher energy and feedstock costs.

Most European stock indexes were closed Thursday. In London, the FTSE 100 index finished flat at 6,087.30.

Asian indexes finished lower. Japan's Nikkei 225 index declined 0.32% to 13,849.99. In Hong Kong, the Hang Seng index fell 0.61% to 25,755.35.

Treasury Market

Treasury bonds reversed to the downside on a resurgence of optimism in equities. The 10-year note was down 09/32 at 97-27/32 for a yield of 3.76% and the 30-year bond fell 17/32 to 97-30/32 for a yield of 4.50%.

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