By Peter McKay
A sharp rebound in stocks put the market within reach of fresh 13-month highs Monday, following dovish comments from the Federal Reserve and strong housing data.
The energy sector led a broad-based round of gains as oil rallied. The dollar sank, and Treasury prices were little changed, reflecting investors' diminished appetite for safe-haven bets.
The Dow Jones Industrial Average (DJI) was recently up 119 points, or 1.2%, at 10437.34, on track to snap a three-day losing streak. The average's recent gain put it less than a point from its recent closing high set last Tuesday. Twenty-eight of the indicator's 30 components posted gains, with Merck & Co. (MRK) and McDonald's Corp. (MCD) the only exceptions, off 0.5% and 0.1%, respectively.
Monday's session has seen a resurgence of the so-called "risk trade" in which investors put cash that was earning little interest back to work in the financial markets. That strategy fell out of favor late last week, fueling the stock market's three-day slide. But most traders and analysts expect it to play a key role on Wall Street well into 2010, with interest rates in the U.S. likely to remain near rock bottom.
"Just because we saw people back off the risk trade a bit Thursday and Friday, people got all up in arms," said Bob Lynch, a currency strategist at HSBC Bank USA in New York. "But it's still very much with us... I think it's very telling that the [stock] market is still near its highs," a phenomenon that traditionally signals strong investor confidence.
The market drew early support from remarks by Federal Reserve Bank of St. Louis President James Bullard, who said Sunday in an interview with Dow Jones Newswires that the U.S. should continue buying mortgage-backed securities past the first quarter of 2010, when asset purchases are due to end.
Bullard's comments stood in sharp contrast to remarks from the European Central Bank last week and helped fuel the view that the U.S. will lag behind other economies globally in raising interest rates and removing the massive liquidity pumped into markets to stimulate growth. Reflecting that increasing divergence in interest-rate expectations, the euro gained almost 1% from Friday, touching the psychologically significant $1.50 level.
Oil futures were boosted Monday by both the dollar's weakness and rising tension over Iran's nuclear program. The oil-producing nation launched a five-day air-defense exercise Sunday, exerting its military might amid continuing Western pressure to accept a nuclear-energy deal negotiated last month with the aid of the International Atomic Energy Agency.
Oil futures were recently up $1.40 to $78.87 a barrel in New York, helping to boost the shares of energy producers. Dow components Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) rose more than 2% each.
The Standard & Poor's 500 (SPX) rose 1.3%, led by a 2% gain in its energy sector. All the index's other categories posted gains as well. The Nasdaq Composite Index (RIXF) was up 1.2%. And the small-stock Russell 2000 (RUT), which tends to benefit at times when investors are growing more aggressive about taking on risk, posted the strongest gain of the major indexes, up 1.8%.
Still, some participants remained on the defensive Monday, including Keith Wirtz, chief investment officer at Fifth Third Asset Management in Cincinnati. "What we're having here is a skeptic's rally," with many portfolio managers buying despite their misgivings about the market's fundamentals, Wirtz said.
Wirtz's firm has been lightening its exposure to stocks and will continue to do so through the end of 2009, except in a few sectors such as energy, basic materials, and technology, he said. Wirtz believes those categories are well-positioned to benefit from a return to growth in the global economy.
Among stocks in focus, LDK Solar Co. (LDK) jumped 8% after the Chinese maker of solar wafers and modules posted a surprise profit for the third quarter, breaking a string of three consecutive quarterly losses. .
Deere & Co. (DE) rose 2.6% after being upgraded to overweight from equal weight by Morgan Stanley analysts. Deere's gains helped to support the S&P's industrial sector, which was up 1.4% in recent action.
Treasury prices were muted following well-bid auctions of 3-month and 6-month bills. Investors will also pay close attention to a record auction of $44 billion in two-year notes slated for 1 p.m. Eastern.
The 10-year note was recently off 4/32 to yield 3.384%.