Stocks rallied, with the Dow holding a triple-digit point gain, helped by an unexpected drop in jobless claims and solid sales reports from some retailers including Wal-Mart.
A credit-rating downgrade on bond insurers and oil's surge to near $128 a barrel shaved some gains in afternoon trading.
The top five gainers on the Dow were: Verizon, Hewlett-Packard, Chevron, ExxonMobil and Wal-Mart.
Jobless claims fell by 18,000 last week; economists had expected a 3,000-claim increase. The four-week moving average of claims dropped by 2,750 to 368,500. However, that week includes Memorial Day, which often skewes the numbers. The four-week moving average of continuing claims, jumped to 3.086 million, the highest level in more than four years.
"The key point here is that claims will rebound over the next couple of weeks, and the underlying trend will continue to grind slowly higher," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a note to clients. "Expect chaos and potentially big increases next month with much bigger-than- usual auto retooling shutdowns," he said.
The market's response is evidence of its desperation, white-knuckling the slightest bit of good news. Still, every little bit helps.
"This market is really trying to fight its way out of this trading range,” Stephen Porpora, managing floor broker at William O’Neil, told CNBC. “A month ago, it was all oil, fertilizer and agri,” he said. “Now suddenly we’re seeing other groups," he said, pointing to the up and coming retailing group, which includes hobbies, consumer games and toys. "You’re beginning to see these moves, we’re begging to see these trends coming in. And we need that to break out of this range we’re in." Porpora said.
May same-store sales are trickling in from retailers and, not surprisingly, discount retailers are the early winners. Many department stores and specialty retailers logged declines.
Wal-Mart hit a four-year high after the discount giant reported same-store sales rose 3.9 percent, boosted by demand for items like groceries, medicines, flat-panel televisions and computers.
Costco said same-store sales rocketed 9 percent, while BJ's Wholesale Clubs logged an increase of more than 13 percent.
One of the biggest retail surprises came from teen retailer The Buckle , which nearly tripled expectations with a 35-percent jump in same-store sales.
In a sign of just how desperate the market is for good news, Home Depot was up about 3 percent after the company's chairman told analysts that this year was going to be bad but once everything shakes out (no time frame specified) the chain expects double-digit per-share profit growth and sales growth of 3 to 5 percent.
Verizon rebounded from the prior session's slide. The telecom giant confirmed that it will acquire Alltel, the No. 5 wireless provider in the U.S., for $5.9 billion plus the assumption of $22.2 billion in debt. Verizon already owns No. 2 Verizon Wireless; combing Alltel and Verizon would create the No. 1 wireless provider in the U.S., eclipsing AT&T .
The European Central Bank kept its key interest rate unchanged at 4 percent but ECB President Jean-Claude Trichet said the central bank may raise the rate at its next meeting in July to tame inflation.
Trichet's warning shot rattled the dollar and pushed crude back up over $126 a barrel . Earlier, oil had slipped below $122.
Natural gas inventories jumped by 105 billion cubic feet, slightly higher than expected.
Ambac and MBIA tumbled again after Standard & Poor's slashed its credit rating on the bond insurers to "AA" from "AAA" and put the ratings on watch. A day earlier, both stocks dropped more than 15 percent on news that Moody's may downgrade its credit ratingson the firms.
Lehman Brothers rebounded for a second day, after sliding 19 percent in the first two days of the week, amid increasing optimism about the firm.
Deutsche Bank reiterated its "buy" rating on Lehman stock. That comes a day after Merrill Lynch upgraded its rating on Lehman to "buy" from "underperform." Lehman has taken steps to clean up its balance sheet, slashing its risky debt holdings by as much as 25 percent and raised $8 billion in capital this year to shore up its balance sheet, according to an internal memo obtained by CNBC.
Still, not everyone waws convinced.
Brad Hintz, an analyst for Sanford Bernstein who used to be CFO of Lehman, slashed his earnings estimates for Lehmanin the second half and next two years, citing the fact that derivates-trading results have been hurt by clients worried about the credit strength of certain units.
And David Einhorn, who the New York Times called a "rabble-rousing hedge-fund manager," was making the TV rounds again this week, singing Lehman's criticisms. Einhorn, who runs a $6 billion hedge fund called Greenlight Capital, said Lehman is coming under the gun because of the role it played in the mortgage market and its lack of transparency. "Lehman has been one of the deniers,” Einhorn was quoted as saying in the Times.
Airlines soared after Lehman upgraded its rating on the sector to "positive." Leading the fleet were Northwest and Delta , both up more than 12 percent.
Continental rose more than 8 percent after the airline announced plans to eliminate 3,000 jobs, or about 6.5 percent of its workforce and cut domestic flights by 16 percent in the fourth quarter. The carrier said it wouldn't announce destinations affected until late next week.
United Airlines announced plans to slash jobs and flights on Tuesday and American parent AMR announced a similar move last month.
Homebuilders were among the day's few decliners as the sector continued to reel from results earlier in the week from Toll Brothers and Hovnanian . Both reported a quarterly loss; Hovnanian's loss increased tenfold from a year earlier.
Honeywell was one of the biggest decliners on the Dow. The company, which makes everything from cockpit electronics to home air purifiers, is being sued by the Justice Department amid allegations it knowingly sold defective materials for bullet-proof vests used by law-enforcement agencies.
Still to Come:
THURSDAY: Earnings from Nat Semi
FRIDAY: Jobs report; wholesale trade; consumer credit; Fed's Evans, Bullard speak
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