Financial Stocks Lead Market Rally

Major indexes advanced Monday after Goldman Sachs boosted its view on big U.S. banks. A rise in the ISM service index also aided sentiment

U.S. stock indexes closed higher Monday,after Goldman Sachs issued a recommendation for large-cap banks and a report from the Institute for Supply Management showed an expansion in the services sector last month. Monday's rally followed the market's first two-week decrease since July.

"This could signal a potential asset allocation shift into equities," says S&P MarketScope.

On Monday, the 30-stock Dow Jones industrial average ended higher by 112.08 points, or 1.18%, at 9,599.75. The broad Standard & Poor's 500-stock index was up 15.25 points, or 1.49%, at 1,040.46. The tech-heavy Nasdaq composite index gained 20.04 points, or 0.98%, to 2,068.15.

On the New York Stock Exchange, 25 stocks were higher in price for every five that declined. Breadth on the Nasdaq was 19-7 positive.

Last week's unemployment data suggested economic recovery will be slow, notes S&P MarketScope. The stock market has rallied 50% since March, apparently discounting effects of various government and Fed stimulus programs.

"Bullish equity investors received a wake-up call late last week as a string of U.S. underwhelming data was punctuated by the disappointing September payrolls report on Friday that dealt a setback to recovery hopes," says Action Economics.

Treasuries were flat-to-lower despite a well-received $7 billion TIPS auction Monday.

The dollar index fell, resuming a downward move that's been in place since March. Finance ministers of the Group of Seven leading industrial nations meeting in Istanbul over the weekend failed to express support for a stronger U.S. currency as some market participants had expected. Japan threatened intervention in forex markets to support the yen.

The weak greenback helped gold futures soar further above the $1,000 mark. Crude oil futures were mixed.

Stocks in Europe were higher, with benchmark indexes posting gains of 0.71% in London, 0.75% in Frankfurt, and 0.69% in Paris. Tokyo stocks fell 0.59%, Hong Kong rose 0.26%, while Shanghai's markets were closed for a holiday.

A White House spokesman denied plans for a second stimulus according to Reuters headlines that appeared to put to rest speculation that preparations for such a plan were gaining momentum in the Obama Administration.

Financial stocks got a boost Monday after Goldman Sachs analyst Richard Ramsden raised his coverage view on large banks to attractive from neutral because their normalized earnings are 39% higher than in 2007, but their share prices don't fully reflect earnings power. He upgraded Wells Fargo (WFC) to buy and added Capital One Financial (COF) to Goldman's Conviction Buy List.

Ramsden remains cautious on regional banks, given permanent earnings dilution, and later-cycle credit issues, although he moderated his stance by upgrading Comerica (CMA) to neutral.

In economic news Monday, the U.S. ISM nonmanufacturing index rose to 50.9 in September, from 48.4 in August, consistent with expectations for a reading above 50, which indicates expansion in the sector. This is the first time in 11 months that the service sector index has reflected growth. The index was at 50.0 last September.

The employment index edged up to 44.3 from 43.5. New orders rose to 54.2 from 49.9. New export orders slipped to 48.5 from 54.0. Prices paid dove to 48.8 from 63.1. The composite manufacturing and nonmanufacturing index climbed to 51.1 from 48.9.

Apart from the ISM nonmanufacturing report, The economic calendar is rather light this week. Last week's unemployment data suggested that the economic recovery will be slow.

Eurozone August retail sales dropped 0.2% month-over-month, but the Eurozone September Services purchasing managers' index (PMI) was revised up to 50.9 from 50.6.

The U.K. Sept. services PMI surged to a two-year high of 55.3 from 54.1.

Bloomberg News reported New York University Professor Nouriel Roubini, who predicted the financial crisis, said stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors. "Markets have gone up too much, too soon, too fast," Roubini said in an interview. "I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year."

Former Federal Reserve Chairman Alan Greenspan said the latest job report showing the nation's unemployment at 9.8% was "pretty awful" and said he expected the figure to climb to 10% and stay there for a while before we start down. He said he was particularly concerned about data in the employment report, released Friday, indicating that an increasing number of Americans have been unemployed for more than six months. That number increased in September by 450,000, reaching 5.4 million, according to the report from the Labor Department.

In company news Monday, shares of Brocade Communications (BRCD) moved sharply higher after the Wall Street Journal reported that the company has quietly put itself up for sale, people familiar with the matter said. Hewlett-Packard (HPQ) is among those kicking the tires, these people said. Other companies including Oracle (ORCL) may also be examining a purchase, said one of the people familiar with the matter. No deal is imminent, these people said, and Brocade could eventually decide not to complete a sale.

Prudential Financial (PRU) shares moved higher after the insurer said it is exploring options with regard to its investment and fund management businesses in Korea.

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