Stocks rallied sharply Wednesday, with the Dow posting its biggest one-day point and percentage gain this year, after global central banks announced a plan to support the global financial system and a handful of better-than-expected economic reports.
The Dow Jones Industrial Average surged 490.05 points, or 4.24 percent to close at 12,045.68, above the psychologically-important 12,000 level, led by Caterpillar and JPMorgan. With the day's gains, the blue-chip index ended in the black for November is back in positive territory for 2011.
The S&P 500 soared 51.77 points, or 4.33 percent, to end at 1,246.96. The Dow and S&P are on track to post their best weekly point gains in almost three years. Nasdaq jumped 104.83 points, or 4.17 percent, to finish at 2,620.34.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, tumbled to finish below 28 for the first time since early November.
All 10 S&P sectors closed firmly in positive territory, led by financials and materials.
The world's major central banks including the ECB, Federal Reserve, Bank of England and the central banks of Canada, Japan and Switzerland agreed to coordinated actionto ease the increasing strains on the global financial system.
The move is designed to "enhance their capacity to provide liquidity support to the global financial system."
“If you stop and think about it, you have to realize what kind of danger the world is in for all the central banks to get together and save Europe,” said Alan Valdes, director of floor operations and VP of trading at DME Securities.
Meanwhile, Valdes added that barring overly negative news from the euro zone, the market is poised for a “Santa rally.”
“The S&P is going up another 7 to 8 percent in December—you’ve got a lot of money managers and traders who are going to have to play catch up.”
Adding to the optimism, China surprised with its first cut in banks' reserve requirements in hopes of boosting an economy running at its weakest pace since 2009.
A handful of positive economic news also helped fuel the rally. The pace of job growth in the private sector accelerated in November, with U.S. employers adding 206,000 jobs, according to the ADP National Employment report. Also on the jobs front, the number of planned layoffs at U.S. firms edged down 0.7 percent in November, according to a report from consultants Challenger, Gray & Christmas.
The jobs data come ahead of a key government employment report on Friday. Nonfarm payrolls are expected to have increased 122,000 in November, according to a Reuters survey, after posting a gain of 80,000 in October.
The Fed's Beige Book showed that economic activity in most major U.S. regions increased at a slow to moderate paceover the last two months.
Meanwhile, business activity in the Midwest grew faster than expected in November as orders surged, according to the Institute for Supply Management-Chicago business barometer. And pending home sales jumped in Octoberby the most in nearly a year to 10.4 percent, according to the National Association of Realtors.
Uri Landesman, president of Platinum Partners said he still expects the S&P to rally near 1,400 by the end of the year.
“However, I think there are some resistance levels along the way so it’s not necessarily going to be a straight line,” Landesman explained. “For example, 1,280 is a resistance level on the S&P—if we can sustain ourselves around that level, then we can rally on—1,350 and then 1400.”
“From a fundamental standpoint, we have to see concerted efforts from world central banks to support the economy and currency…However, I’m not really bullish on 2012—we need to see confidence gaining,” he continued. “We may start the year at 1,400 [on the S&P], but you’re going to need some substantial good news.”
In Europe, EU finance ministers agreed to ramp up the firepower of their rescue fund but left a number of questions unanswered, including the exact size of the increased fund.
“There’s going to be a lot of volatility in the next 10 days centered around meetings in Europe,” noted Landesman.
After the market close Tuesday, Standard & Poor's reduced its credit ratings on 15 large financials, mostly in the Europe and U.S. as the result of a sweeping overhaul of its ratings criteria.
JPMorgan Chase , Bank of America , Citigroup , Wells Fargo , Goldman Sachs and Morgan Stanley , were among the banks that had their ratings reduced by one notch each.
Netflix was one of the few stocks trading lower on the S&P after Wedbush Securities cut its rating on the online movie streaming company to "sell" from "neutral."
Among earnings, American Eagle Outfitters rallied after the teen apparel retailer topped earnings estimates and forecast a strong end to the holiday season. Rival Aeropostale is slated to post earnings after-the-bell tonight.
Weekly mortgage applications declined for a third week in a row, due to a drop in refinancing demand, according to the Mortgage Bankers Association.
—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—
On Tap This Week:
THURSDAY: Jobless claims, ISM mfg index, construction spending, chain store sales, auto sales; Earnings from Barnes & Noble, Kroger, Lululemon, H&R Block
FRIDAY: Employment situation, Fed's Plosser speaks; Earnings from Big Lots
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