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Dow Jumps 5.8% in Bank-Fueled Rally

Stocks took off like a rocket Tuesday, rebounding off of 12-year lows to score their best day in more than three months.

The Dow Jones Industrial Average gaining a whopping 5.8 percent to close at 6,926.49.The S&P 500 rose 6.4 percent to close at 719.60. The Nasdaq jumped 7.1 percent, ending at 1,358.28.

All 30 Dow stocks finished higher. Volume was heavy on the New York Stock Exchange at 2.2 billion shares, with ninety percent of that volume positive.

Banks blazed the trail after several pieces of news out of the sector stirred some optimism on the sector.

Kicking it off this morning was Citigroup CEO Vikram Pandit, who said that the bank was profitable in the first two months of the year. He also said he is confident about the bank's capital strength.

Citigroup shares soared 38 percent to close at $1.45.

That was followed by news later in the day that the uptick rule on shorting stocks — which requires that the last trade on a stock must be positive before a trader sells short, or bets against the stock — may soon be restored. Bank stocks have been among those most battered by short sellers as the credit crisis rattled confidence in banks.

Bank of America also benefited from a report a day earlier that the company would emerge successfully from the credit crisis. Its shares jumped 28 percent to close at $4.79.

The last time we saw this big of a gain on the S&P was in November, when the government stepped in to help rescue Citigroup the first time.

As if the market needed any more good news to paint the board green, news emerged late in the session that Ponzi-scheme swindler Bernard Madoff was expected to plead guilty to 11 counts, which means no plea deal and the possibility that he will serve up to 150 years in prison.

As traders basked in the glow of today's rally, the question became: Is the banking sector — or the market itself — turning the corner?

"I think this is more than a relief rally based on the news that's triggering it," said Nadav Baum, managing director of investments at BPU Investment Management, citing Citi's comments that it's off to a good start this year and comments recently from Bank of America CEO Ken Lewis that Countrywide and Merrill are doing very well.

Still, he says, we'll have to wait a couple days and see what happens.

HSBC gained 12 percent after hitting its lowest level since 1995 on Monday. More volatility was expected as investors position themselves ahead of the bank's $17.7 billion rights issue.

Shares of Capital One continued their rise, jumping 15 percent, a day after the credit card company announced it was cutting its dividend 87 percent.

General Electric , which has taken a beating over worries about the company's financial arm, joined in the rally, with shares soaring 20 percent to $8.87.

Federal Reserve Chairman Ben Bernanke offered some encouraging words to the market.

The Fed chairman said the U.S. and other financial regulators must impose strict rulesto help detect and prevent another financial crisis like this one.

"We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components,'' he said in remarks prepared for delivery to the Council on Foreign Relations.

He also laid out some key elements of such an overhaul, including legislation from Congress to spell out how to handle the failure of a large financial institution in an orderly way.

Meanwhile, the SEC has no plans to suspend mark-to-market accounting rules, Reuters reported.

Mark-to-market accounting rules have forced banks to make huge write-downs to assets and there had been some buzz in the market that if the rules were suspended, stocks could explode because it would take a lot of pressure off of banks. A House hearing on the matter is scheduled for Thursday.

But David Lutz, a trader at Stifel Nicolaus, said this was expected.

“This is nothing new from the rhetoric that we had from Fed Governor Lockhart when he said specifically they’re not going to suspend mark to market," Lutz said. Today’s news "does carry some weight obviously. It’s all headline risk out there now because everyone is so underweight and short this sector.”

Outside of financial-related stocks, Alcoa and DuPont were among the strongest Dow performers, up 14 percent and 11 percent, respectively.

McDonald's , the low-cost comfort-food star of the recent downturn, came in last place on the Dow, with a gain of just half a percent, after the company said the global economic slowdown was catching up to its business.

That seemed to be the trend, as investors piled into financials and other beaten-down stocks, they gave up their comforts: Among the other decliners on the S&P were Southern Comfort maker Brown-Forman and chocolatier Hershey .

Gold stocks, a safe haven from the recent volatility, also retreated, with Newmont Mining down 7.3 percent and Barrick Gold down 6.9 percent.

Rohm & Haas gained 5.4 percent after a deal was finalized for its acquisition by Dow Chemical. The deal is expected to close by April 1 under terms similar to the $78 a share price agreed to in July. Dow Chemical shares slumped 8.7 percent.

United Technologies jumped 8.6 percent after the company announced plans to eliminate 11,600 jobs from its payrolls, cut its stock buyback in half and slashed its 2009 outlook.

And in tech land, Texas Instruments gained 6.6 percent after the chip maker narrowed its first-quarter forecast, aiming to tighten its belt with plant closings and inventory reductions to weather the slump in demand.

Intel shot up 11 percent and Cisco gained 7.5 percent.

Still to Come:

WEDNESDAY: Weekly mortgage applications; weekly crude inventories; Fed budget; Earnings from American Eagle, Nat Semi, Neiman Marcus, Staples; House panel meets on mortgage-lending reform
THURSDAY: Retail sales; weekly jobless claims; business inventories; Earnings from Smithfield foods
FRIDAY: International trade; import/export prices; consumer sentiment; Geithner to attend G20 meeting in UK.