Stocks ended at session highs Wednesday, led by banks, amid enthusiasm for this so-called "bad bank" plan and as the $825 billion stimulus package neared approval.
The Dow Jones Industrial Average extended its winning streak for a third straight day, gaining 200.72, or 2.5 percent. The S&P 500jumped 3.4 percent and theNasdaq advanced 3.6 percent.
This was the rally that could, with the S&P breaking through the top of its recent range, 800 to 865, after a yo-yo session on Tuesday that resulted in a modest gain. The S&P has now risen for four straight sessions, its longest rally since the end of November.
The market was buzzing with news that the Obama administration is said to be close to finalizing a “bad bank” plan to mop up banks' toxic assets. FDIC chairwoman Sheila Bair is apparently floating the idea that the FDIC could manage the "bad bank."
Banks dominated the Dow, with Citigroup soaring 19 percent, Bank of America advancing 14 percent and JPMorgan gaining 10 percent.
Wells Fargo shares surged 31 percent, making them the biggest gainer on the S&P 500, as the bank reported a surprise loss but maintained its dividend and said it doesn't need any more bailout fundsto help it absorb Wachovia bank.
The Financial Select SPDR exchange-traded fund gained 13 percent as traders looked for the sector to get a big boost.
The implications of the "bad bank" plan being able to loosen credit lending gave a boost to other sectors such as technology and consumer discretionary, with Dell up 8 percent, Overstock.com up 13 percent, Macy's up 4.9 percent and Disney up 4.9 percent.
Investors were also jazzed about the gigantic stimulus plan, which is said to be close to $900 billion now. The House of Representatives is slated to vote on the plan today. If it clears the House, then Senate leaders could begin working on their version.
The Fed held its target for short-term interest rates between 0 and 0.25 percent, as expected, and vowed to keep looking at alternative tools at its disposal for juicing the economy. Specifically, the central bank said it was prepared to buy long-term Treasury Securities if necessary. The Fed noted that credit was "extremely tight," an escalation from just "tight" in its last statement.
Early earnings showed a mixed bag, with companies reporting lower profits but investors looking for positive nuggets amid the gloom.
AT&T reported its profit dropped, hurt by one-time fees to get the exclusive rights to be the sole iPhone carrier and more customers cutting off their land lines. Its shares ended flat.
This came a day after Verizon met its earnings target but reported a slowdown in its wireless business. Its shares rose 3.2 percent.
Boeing reported an unexpected loss as its results were hurt by a strike and delays for its new 747 jumbo jet. Its shares ended flat.
Legg Mason shares skidded 7.3 percent after the asset manager posted a bigger-than-expected lossas withdrawals from its funds soared and it had to take charges related to its wealth-management division. But the second-largest publicly traded U.S. asset manager said it is "aggressively" cutting costs.
Yahoo shares jumped 7.9 percent after the Internet portal late Tuesday beat Wall Street expectations, helped by cost cuts, but warned the bleak advertising market is going to hurt sales going forward.
Sun Microsystems shot up 22 percent as the server maker topped forecasts with a smaller-than-expected loss.
Political and business leaders from around the globe gathered at the World Economic Forum in Davos, Switzerland, to discuss the state of the economy and the potential road to recovery.
In economic news, mortgage applications fell to November levels after a tick higher in interest rates discouraged potential home buyers. The news came during a modestly positive week for housing, with previous reports showing a gain in home buying and a drop in prices that was a bit less than analysts expected.
Still to Come:
WEDNESDAY: Davos Economic Forum begins; Fed decision on interest rates; Earnings from Pfizer, Boston Scientific, Qualcomm and Starbucks
THURSDAY: Weekly jobless claims; durable-goods orders; new-home sales; Earnings from Altria, Amazon, Broadcom, Colgate-Palmolive, Ford, Eli Lilly and Wyeth
FRIDAY: Q4 GDP; consumer sentiment; Earnings from Chevron, ExxonMobil, P&G and Honeywell
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