By Peter McKay
The stock market clung to a broad-based gain Monday afternoon following an early leap driven by rate-related comments from a Federal Reserve official and strong housing data.
Major indexes have trimmed their gains since hitting late-morning highs, with many participants heading to the sidelines. But the Dow Jones Industrial Average has managed to hold onto a triple-digit gain throughout trading so far -- a welcome rebound from its recent three-day slide.
The Dow (DJI) was recently up 136 points, or 1.3%, at 10,454, on track to snap a three-day losing streak. 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.
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 1.4%. 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 2%.
Treasury prices were muted following well-bid auctions of 3-month and 6-month bills. But demand for two-year debt was weak, pushing the two-year note down 1/32 to yield 0.743% in recent action. The benchmark 10-year note was off 6/32 to yield 3.390%.
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.
"It's hard to fight the flood of liquidity that opens on this market on any day when the dollar weakens," said Art Hogan, chief market analyst at Jefferies & Co. "We saw things go back the other way a little bit last week, but now those floodgates are back open again."
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 73 cents to $78.20 a barrel in New York, helping to boost the shares of energy producers. Dow components Exxon Mobil Corp. (XOM) rose 1.8% and Chevron added 2.6%.
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.