Stocks Close Up on Strong Economic Signs

Stocks continued their march higher Monday, kicking off the first full week of May on a solidly positive note  that was spurred by positive economic signs and a strength in banks before the release of stress test results.

The indexes had pared some gains following a hard-line tax statement from the Obama administration, but closed strong as American International Group shares led a last-hour surge.

Stocks jumped off news that pending home sales gained 3.2 percent in March, better than expected and perhaps a further indication that the real estate market is nearing a bottom.

At their highs, the Dow industrials and the Standard & Poor's 500 each gained more than 2 percent while the Nasdaq tech gauge was close behind. The indexes briefly pared some of those gains after Treasury Secretary Timothy Geithner said the administration would end "indefensible" tax breaks and loopholes that unfairly benefited some companies and well-off individuals.

There was some dispute over whether the market was due for a pullback after a two-month rally, but the averages seemed intent on moving higher.

"This rally continues," Steve Massocca, of Wedbush Morgan Securities, told CNBC. "It's pretty clear that the worst is over for the economy right now."

Many observers believe the market found its low in March.

Bank of America Securities/Merrill Lynch raised both its support and resistance levels for the Standard & Poor's 500. The resistance is now 1050-1055 and support is at 825-845, said Mary Ann Bartels, head of technical market analysis, who added that historical trends show that an April rally helps thwart the usual appetite for selling in May.

"An up April has a tendency to neutralize a negative seasonal bias in May," Bartels wrote in a research note. "This implies that the market rally can continue."

Some positive earnings results and optimism over bank stress tests also boosted the market move, as Sprint Nextel shares surged after the company beat Wall Street estimates. Hopes that the swine flu epidemic won't be as bad as feared also lifted the market's mood.

"Markets are very resilient at this stage," Christian Gattiker, head of research at Julius Baer, said. Investors are expecting a "rather benign" outcome from the financial crisis, he added.

The National Association of Realtors reported the gain in its pending sales index, which represents housing sale contracts that have not been closed. The organization noted that it would need to see a string of positive monthly results before a true recovery is seen.

At the same time,

construction spending also rose in March

for the first time in six months, edging up 0.3 percent, according to government data on Monday.

The gain contrasted with analysts' forecasts of a 1.5 percent drop in spending.

Meanwhile, the stress test results are expected to show that the banks may have to raise $150 billion or more in fresh capital, according to Reuters.

Early reports were that Bank of America is working on plans to raise more than $10 billion in fresh capital but the company later denied the report and its stock surged.

Citigroup launched last-ditch attempts to convince the U.S. government it does not need to bolster its balance sheets, the Financial Times reported. A Wall Street Journal report indicated Citi may have to raise as much as $10 billion as well but its shares too were strong.

Bank stocks were broadly higher, led by Wells Fargo .

Alcoa shares surged past the $10 mark, where the stock has not closed since Jan. 9, to lead Dow gainers. The bluechip index saw only one decliner among the group, Microsoft . Wells Fargo gains remained strong even after news that the company would need to raise capital to meet stress test demands.

In earnings, Spint Nextel beat analyst estimates even as more postpaid customers defected to rival services and business customers canceled services due to the recession.

Sprint's net loss swelled to $594 million, or 21 cents per share from a loss of $505 million, or 18 cents per share in the same quarter a year ago.

But excluding unusual items, Reuters Estimates said that it would have posted a profit of 3 cents a share compared with average analyst estimates for a loss of 4 cents a share.

Retail stocks also helped to spur Monday's rally.

Liz Claiborne shares gained more than 20 percent and Jones Apparel also posted gains after the latter reporte earnings that beat expectations.

Those worried about a market pullback focused on the relatively thin volume that has accompanied the rally.

About 1.6 billion shares changed hands heading on the New York Stock Exchange. Gainers beat losers 5.6 to 1.

Elsewhere in earnings, Tyson Foods posted a quarterly loss that was worse than expectations, due to lower meat sales and additional tax expenses. Shares fell 3.3 percent premarket.

Kansas City Federal Reserve President Thomas M. Hoenig will speak on the financial crisis at 12:30 pm New York time in New York, and Richmond Fed President Dr. Jeffrey Lacker will give his economic outlook at the same time in Charlottesville, Va.

© 2009 CNBC.com