U.S. stocks rose Wednesday after an unexpected increase in January retail sales.
The Dow Jones Industrial Average shot up more than 100 points in the first five minutes of trading, but backed off a little after the dust settled. The broader S&P 500 index and the tech-heavy Nasdaq also rallied.
Retail sales rose 0.3 percentlast month from December, largely reflecting increases in sales of new cars and gasoline. Economists had expected the gauge to drop by 0.4 percent. Excluding autos, gasoline and building materials, retail sales climbed 0.2 percent.
"As much as people want to get excited about this number, the same theme is there, which is that the U.S. consumer is slowing rapidly from the fourth quarter into the first quarter," Drew Matus, an economist at Lehman Brothers, told CNBC. "There is no good reason for [consumers] to get suddenly optimistic about the world," he said, adding, "the rest of the first quarter is probably not going to look so great."
David Turner, a retail analyst with BB&T Capital Markets echoed that sentiment. "The headline number doesn't account for promotional activity," which is heavier after the holidays and winds up putting pressure on margins, he told CNBC. "Sales may look good, but I don't think the profits are following suit."
The rally was likely due to the fact that the market was expecting retail sales to decline, which would've been the second straight month-to-month, something that hasn't happened in five years and would suggest that the economy was slipping into recession. Of course, there's also the fact that the market is oversold and investors are looking for any excuse to jump in.
"I do think we're going to continue to see a lot of volatility in this market," Donna Heidkamp, from RJO Futures, told "Worldwide Exchange."
Retail analysts still have some picks in the sector. Turner likes Pacific Sunwear, Skechers and City Trends, all largely based on valuations.
Charles Grom, a retail analyst at J.P. Morgan, is long Costco -- which has a 55 percent mix of food in its product line -- and J.C. Penney. He told CNBC that he thinks the department stores are headed for a rally and investors want to be well positioned to take advantage of it. Grom is underweight on Family Dollar, Dollar Store and Wal-Mart because they're "value traps" that are already up about 20 percent.
In other economic news, U.S. business inventories swelled by a larger-than-expected 0.6 percent in December as sales declined. However, the stock-to-sales ratio, which measures how long it would take to clear out inventories at the current sales pace, was at 1.26 months, higher than November but lower than the year-ago period.
Treasury Secretary Henry Paulson also offered the market some encouragement, repeating his view that the U.S. economy will avoid recession this year, though it will grow at a slower pace. He also said that Treasury will act quickly to distribute tax rebates.
The Mortgage Bankers Association reported its seasonally adjusted home-loan-application index fell 2.1 percent in the week ended Feb. 8 to 1,063.5, after hitting a peak in the prior week last seen in late March 2004.
Yahoo remained in the spotlight after the company's second-largest shareholder urged Microsoft to raise its $42 billion offerand said that, ultimately, it will be hard for Yahoo to resist any offer Microsoft makes. Meanwhile, reports suggested that Google may be losing interest in any alliance or deal with Yahoo and that News Corp. may be considering jumping into the mix.
It's a busy day for earnings. Dow component Coca Cola reported a higher-than-expected profit, as the soft-drink giant offset weak sales of Coca-Cola and Sprite with strong sales in emerging markets, acquisitions of noncarbonated drinks including Vitaminwater, and the introduction of Coke Zero, a no-calorie version.
Steel giant Arcelor Mittal reported 2007 results in line with expectations and gave upbeat guidance for the first quarter of 2008 as global demand for steel remains robust. But shares slipped more than 5 percent, with the latest quarterly numbers falling short of expectations and shares up about 24 percent since mid-January.
Miner Rio Tinto also reported record earnings and its CEO told CNBC that BHP Billiton's bid was too low to offer value to its shareholders. Strong demand from China's growing economy will continue to drive commodities, Rio chiefexecutiveTom Albanese also said.
Tractor maker Deere's profit surged 55 percent to 83 cents a share in the fiscal first quarter ended January 31 from 52 cents in the same period last year.
In politics, Sen. Barack Obama won Democratic primaries Virginia and Maryland on Tuesday and reached out for another in the District of Columbia in a determined drive to erase Sen. Hillary Rodham Clinton's delegate lead in the party's presidential race.
Republican front-runner Sen. John McCain won both states, adding to his big lead in delegates for the GOP nomination.