Stocks: At Last, a Rally

Indexes shot higher Wednesday after a surprisingly strong profit report from Wells Fargo and another big drop in crude oil

Stocks stopped their slide Wednesday, rallying on strong earnings news from Wells Fargo (WFC) and another drop in oil prices.

Traders also eyed a second day of Congressional testimony from Federal Reserve Chairman Ben Bernanke, and reports on consumer-level inflation and industrial activity.

On Wednesday, the Dow Jones industrial average jumped 276.74 points, or 2.52%, to 11,239.28. The broader S&P 500 index climbed 30.45 points, or 2.51%, to 1,245.36. The tech-heavy Nasdaq composite index vaulted higher by 69.44 points, or 3.12%, to 2,284.85.

Trading was active. On the New York Stock Exchange, 24 shares rose in price for every eight that declined. On the Nasdaq, the ratio was 22-7 positive.

In a rare piece of good news from the banking sector, Wells Fargo raised its dividend 10% after posting better-than-expected earnings of 53 cents per share, vs. 67 cents a year ago. Revenue rose 16%, but higher provisions for credit losses ate into profits.

Wells Fargo shares surged almost 33%, with other financial stocks following it higher. S&P's diversified bank index rose 24%; the S&P thrift and mortgage finance index gained 19.23%; and investment banking and brokerage stocks rose 12.6%.

Also lifting stocks was action in the oil market, where the price of crude has fallen more than $10 in the past two days. On the NYMEX, crude oil for August deliver fell $4.14 to $134.60 per barrel on Wednesday. In response, trucking and airline stocks rallied.

Wednesday's stock market rally was the first major up day since June 5, the last session when the Dow gained more than 200 points. Since June 5, the Dow is down 9.38%, the S&P 500 is off 9.6% and the Nasdaq is down 7.9% -- even after Wednesday's rally.

Chris Johnson of Johnson Research Group said Wednesday didn't necessarily represent a shift in the market's momentum. The market has been beaten down so much that investors are looking for excuses to buy, he says. There is a lot of money on the sidelines trying to predict when the market hits bottom, and many short sellers, who have profited from the market's slide, are eager to take profits.

"We've been down so much and so often, that any piece of good news is going to spark a rally," Johnson says.

Also Wednesday, inflation fears were raised by news that the U.S. consumer price index jumped 1.1% in June. The core rate, excluding food and energy, rose 0.3%. From a year ago, the CPI is up 5%, the highest since 1991. Energy prices rose 6.6% in June, up 24.7% from a year ago, and gas prices soared 10.1% in June.

U.S. industrial production rebounded 0.5% in June, well above the flat reading expected by markets and the 0.2% drop reported a month ago. This brought capacity utilization up to 79.9% from 79.6% in May (revised from 79.4%). The manufacturing index rose 0.2%, after falling 0.1% in May (revised from a flat reading previously).

The National Association of Home Builders said its home builders' sentiment index fell two points in July to a record-low 16, with all three components of the survey also dropping to historic lows. The NAHB/Wells Fargo housing market index shows only one-in-six home builders has a positive view of the market.

Traders were looking ahead to Thursday’s reports on weekly initial jobless claims, June housing starts, and the July Philadelphia Fed index.

Wednesday's optimism about the financial sector could be derailed, or confirmed, by earnings reports from Merrill Lynch (MER) on Thursday and Citigroup (C) on Friday. Also, Merrill may announce a deal Thursday to sell its 20% for $4.5 billion to $5 billion, CNBC and the Wall Street Journal reported.

It wasn't all good news for the financial sector Wednesday. Ratings agency Fitch downgraded the credit rating of Bank of America (BAC) from AA to A+, reflecting pressure on the company from writedowns on various asset classes in its capital markets business and from its consumer and commercial credit portfolios.

In the second leg of his semi-annual testimony before Congress Wednesday, Bernanke told a House panel a strong economy should help firm up the dollar, and that it's up to the Fed to get the fundamentals right. Bernanke said he has "great confidence" in the underlying strength of the economy.

In a Q&A session with lawmakers, the Fed chief said that Fannie Mae (FNM) and Freddie Mac (FRE) are well capitalized. He also suggested Congress should act quickly on the Treasury's GSE plan. He agreed with the belief that inflation is a tax, and he acknowledged inflation is too high currently. Indeed, slowing inflation is a "top priority." He also repeated it's crucial for the Fed to maintain price stability.

The FOMC minutes to the June 24-25 policy meeting showed an ongoing split between the hawks and doves on the Committee, notes Action Economics, not surprising given the dissent by President Fisher and the uncertainty over the direction of the economy and inflation. Interestingly, most noted that the slightly firmer consumer spending path wouldn't be sustained and saw "significant" downside risks to growth. At the same time, the outlook for inflation had deteriorated as well. Some officials saw the need to raise rates "very soon."

Among stocks in the news Wednesday, CSX Corp. (CSX) posted earnings of 93 cents per share, vs. 71 cents a year ago, as revenue rose 15%. A Merrill Lynch analyst upgraded the stock from neutral to buy, after the railroad firm said it continues to expect earnings in the upper end of its previous 2008 earnings guidance.

Intel (INTC) reported earnings of 28 cents per share, 3 cents higher than analysts were expecting.

Northern Trust Corp. (NTRS) posted earnings of 96 cents per share, vs. 92 cents a year ago, as total revenue rose 24%. The quarter's results included previously disclosed accounting charges on lease transactions.

Sun Microsystems (JAVA) says it expects fourth quarter revenue of $3.725 to $3.8 billion, and earnings of 5 to 15 cents per share.

Abbott Laboratories (ABT) posted earnings of 85 cents per share, vs. 63 cents a year ago, as sales rose 15%. The firm expects earnings of 72 to 74 cents per share next quarter.

AMR Corp. (AMR) posted a loss of $1.13 per share, less than the $1.40 analysts were expecting. Record fuel prices offset a 5.1% rise in revenue for the parent of American Airlines.

Delta Air Lines (DAL) reported earnings of 35 cents per share excluding write-downs, and revenue rose 10%. In the second half of the year, Delta expects to reduce its domestic capacity by 13% from the year before, but increase international capacity 14%.

Gannett Co. (GCI) posted earnings of $1.02 per share, vs. $1.24 a year ago, as total operating revenue fell 9.9%.

Knight Capital Group (NITE) posted lower-than-expected earnings of 32 cents per share, vs. 24 cents a year ago, as revenue rose 8.8%.

Chicago Bridge & Iron Co. (CBI) says it will take a $317 million hit from cost overruns on two major liquefied natural gas projects in the United Kingdom.

Old Dominion Freight Line (ODFL) expects quarterly earnings of 62 to 64 cents per share, more than 11 cents above consensus estimates. Tonnage is up 10.2% from a year ago for the firm, which also cited more stable prices and improved productivity.

Major European indexes turned mixed in late trading Wednesday, reversing earlier losses. In London, the FTSE 100 index fell 0.41% to 5,150.60. In Paris, the CAC 40 gained 1.26% to 4,112.45, while Germany's DAX index added 1.21% to 6,155.37.

In Asia, Japan's Nikkei 225 inched up 0.05% to 13,760.80, while Hong Kong's Hang Seng Index rose 0.23% to 21,223.50.

Treasury market

Treasuries fell sharply Wednesday. The 10-year note tumbled 29/32 to 99-16/32 for a yield of 3.94%, and the 30-year bond plunged 64/32 to 96-19/32 for a yield of 4.56%.

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