Stocks raced to the finish line as oil dropped for a third straight session and JPMorgan earnings sparked a much-needed rally in financials.
The Dow Jones Industrial Average surged more than 200 points, or 1.9 percent, to close at 11446.66. The blue-chip index gained nearly 2 percent in the prior session, marking its best two-day percentage gain since October 2002 and its best two-day point gain since November.
Both the S&P 500 index and the Nasdaq advanced 1.2 percent.
The two-day rally delivered hefty gains to some beaten-down stocks including United Airlines parent UAL . United jumped 62 percent, Fannie Mae gained 55 percent and Bank of America , added 36 percent in the past two trading sessions.
Oil dropped more than $5 to settle at$129.29 a barrel -- down from the all-time peak of $147.27 last week -- as short covering ran out of steam. The front-month contract has dropped 11 percent in the past three sessions, marking its biggest three-day loss in percentage terms since December 2004.
The decline in oil prices gave a boost to consumer discretionary stocks including autos, hotels, and retailers.
Aside from oil's descent and a handful of better-than-expected earnings, traders note some encouraging signs in the past few sessions.
"We’re starting to see some M&A activity almost on a daily basis – that’s encouraging," Gordon Charlop of Rosenblatt Securities told CNBC. "Volume is back in the house ... and ... yesterday's move -- I thought it was measured. It was sort of like a 45-degree climb, nice and easy, a very gentle way -- proper way -- to go up."
Still, market pros cautioned not to get too excited.
“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," Charlop said.
"It's a sucker's rally," Kathy Boyle, president of Chapin Hill Advisors, said of the market's upswing. "If you make money here, don't get greedy."
The problem is that the market is stuck in a "vaccuum" of short-term trades, Citigroup's equity strategists wrote in a note to clients, which implies that there's little or no value in most financials and consumer stocks.
So, what's it going to take to get traders thinking long term again?
"Home price stabilization could turn off the vacuum," Citi said, "just as overly aggressive tech spending marked the end of the tech bubble."
JPMorgan Chase shares jumped 14 percent after the brokerage beat market expectations. Earnings came in at 54 cents a share after a $540 million loss linked to the acquisition of troubled investment bank Bear Stearns. Analysts surveyed by Reuters had forecast JP Morgan's earnings at 44 cents a share.
Financials were the day's best performers, with the S&P 500 financial index up 5.4 percent and Bank of America leading the Dow with a 17-percent gain.
Citigroup rose 9.1 percent and Lehman Brothers soared 14 percent.
JPMorgan's results breathed life into the financial sector, following 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."
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 Bloombergback to the media company for $4.5 billion but decided to keep its 49 percent stake in BlackRock .
Among other Dow components reporting today, Coca-Colabeat expectations with a profit of $1.01 a share; analysts had expected 96 cents a share. United Technologies topped forecasts by two cents with earnings of $1.32 a share and also raised its outlook.
The first round of earnings has surprised analysts to the upside but the quarter is still expected to be pretty brutal: Analysts expect S&P 500 earnings to drop 16.1 percent and for financial earnings to plunge 76 percent, according to Thomson Reuters.
Also giving stocks a boost was a report that showed housing starts unexpectedly jumped 9.1 percent to a 1.066 million annual rate in June and building permits increased 11.6 percent, though the gain in starts was largely due to a change in New York City building codes.
Fannie Mae and Freddie Mac rallied for a second straight day after Freddie Mac completed its second successful debt sale this week, calming fears after a government bailout of the mortgage-finance companies. The stocks finished up 18 percent and 22 percent, respectively.
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. 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. Claims data are volatile this time of year due to annual auto-plant shutdowns.
General Motors shares were among the top gainers on the Dow, jumping 12 percent. Earlier this week, the auto maker announced plans to further pare its white-collar workforce and suspend its dividend.
Nokiahit its earnings targetas business at the world's biggest mobile handsets maker was helped by emerging markets.
And motorcycle maker Harley Davidson also easily beat expectations even though earnings fell 23 percent on a 2.9 percent decrease in sales due to the economic slowdown. Investors, though, cheered the company for reiterating its full-year forecast.
EBay fell 14 percent to its lowest point in two years, making it the biggest drag on the Nasdaq 100. The online auctioneer beat forecasts but the results were overshadowed by its weak outlookfor the current quarter and unchanged full-year estimates.
Still to Come:
FRIDAY: Earnings from Citigroup, Honeywell
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