Financials Lead Rally After JPMorgan Earnings

Stocks rallied for a second day Thursday, led by financials, after JPMorgan and two other Dow components beat earnings forecasts.

It was an encouraging follow-on but the market isn't out of the woods yet.

“I don’t think you can say we’re going to take off yet. Obviously there are a lot of underlying issues that have still got to be feted out," Gordon Charlop of Rosenblatt Securities told CNBC.

Still, Charlop has found several things encouraging: "We’re starting to see some M&A activity almost on a daily basis – that’s encouraging. Volume is back in the house ... and ... yesterday's move -- I thought it was measured," he said. "It was sort of like a 45-degree climb, nice and easy, a very gentle way -- proper way -- to go up."

JP Morgan Chase surged more than 10 percent, making it the biggest gainer on the Dow. The company beat market expectations with earnings of 54 cents a share after incurring a $540 million loss linked to the acquisition of troubled investment bank Bear Stearns in March. Analysts surveyed by Reuters had forecast JP Morgan's earnings at 44 cents a share.

Financials rallied on the news, with Bank of America Citigroup and Lehman Brothers all up sharply.

JPMorgan's results were an encouraging sign, especially given the better-than-expected report from regional bank Wells Fargo earlier this week but JPMorgan CEO Jamie Dimon remained cautious, saying there will be no dividend increase "until we see clear daylight."

Wells Fargo is picking up mortgage applications from former competitors, CFO Howard Atkins told CNBC.

More earnings from the financial sector are on the way this week, with Merrill Lynch due out after the bell today and Citigroup before the bell Friday.

Merrill Lynch, seeking to shore up its capital, agreed to sell its 20 percent stake in Bloomberg back to the media company for $4.5 billion but decided to keep its 49 percent stake in BlackRock .

Among other Dow components reporting this morning, Coca Cola beat expectations with a profit of $1.01 a share; analysts had expected 96 cents a share. United Technologies beat expectations by two cents, with earnings of $1.32 a share.

Economic data also gave the market a boost.

Housing starts unexpectedly jumped 9.1 percent to a 1.066 million annual rate in June and building permits increased 11.6 percent. New construction on single-family homes, however, fell. The sharp rise in overall starts was mostly due to a change in New York City building codes, that, if excluded, would've left starts down 4 percent.

Fannie Mae and Freddie Mac rallied, with both stocks up more than 20 percent.

In other economic news, the Philadelphia Federal Reserve reported its manufacturing index came in at minus 16.3 in July from minus 17.1 in June; economists had expected minus 15. Prices paid rose while employment was down.

Jobless claims rose by 18,000 -- nearly half of what was expected -- last week but claims were still at the highest level since last June. This followed a sharp drop in the prior week but claims data are volatile this time of year due to annual auto-plant shutdowns for retooling.

General Motors shares were among the top gainers on the Dow. Earlier this week, the auto maker announced plans to further pare its white-collar workforce and suspend its dividend.

Nokia hit its earnings target as business at the world's biggest mobile handsets maker was helped by emerging markets.

And motorcycle maker Harley Davidson