Wall Street closed with a head of steam Tuesday, with a rally powered ahead by hopes for the financial market, relief for banks and a bit of short-covering thrown in for good measure.
With a rocky and volatile month and declining volume, the rally provided opportunity for end-of-year window dressing and an opportunity for investors to snag some beaten-down big names.
"It's a relief rally. We were down so many days in a row here and a lot of people were short. You have a big up day, the shorts scramble to cover," said Phil Silverman, managing partner at Kingsview Management in New York. "There's a lot of people just getting out of the way and closing their books for the year."
Wall Street also got some help from Europe: A report showed German business optimism rising unexpectedly and as Spanish short-term financing costs fell sharply. European markets also posted solid gains at the close.
Yields on three and six-month Spanish treasury bills fell sharply and demand surged in an auction on Tuesday, with analysts saying, according to Reuters, that banks were waiting to tap into an ECB three-year liquidity offer on Wednesday to pay for the higher-yielding Spanish bonds.
Closer to home, housing starts and building permitsboth rose sharply in November, data that reinforced recent numbers showing gains in builder sentiment and increases in sale prices.
Home builder stocks jumped on the news, with Lennar and Beazer leading the way.
The gain in starts came primarily from apartment buildings, but there still was enough in the numbers to provide encouragement that the sector is recovering.
"Looking ahead to 2012, we believe residential investment will be a net positive to growth next year due to the two bright spots of the construction sector: multifamily building and renovations," Michelle Meyer, economist at Bank of America Merrill Lynch said in a note.
All 10 sectors on the Standard & Poor's 500 gained at least 2 percent — energy topped 4 percent and materials, as a proxy for housing, was close behind — and all 30 Dow industrial stocks also showed green, with Cisco , Caterpillar and banking stocks setting the pace. Telecomm and consumer firms such as Coca-Cola and Verizon were the slowest gainers.
Bank of America shares surged, a day after the company saw its share price slip below the critical $5 level as concerns grew over how the banks could withstand tougher capital rules and European contagion.
Jefferies, the investment bank that only a short time ago found itself under scrutiny for exposure to the European debt crisis, reported earnings of 21 cents a share that blew past market expectations, largely on the strength of reducing its leverage. The company also declared a quarterly dividend of 7.5 cents a share.
The CBOE Volatility Index , which measures investor anxiety about the coming 30 days, fell to its lowest level since late July.
"There's no reason why this market couldn't go up and send to S&P to where it was a week ago, just based on the volatility in the market lately," Silverman said. "That would be kind of nice. But looking forward into 2012, when everyone gets back and recognizes that Europe isn't fixed and things are definitely slowing down, what happens in the next two weeks really isn't going to make much difference."
The market importantly broke a six-day streak of hitting its highs in the first hour of trading and then selling off during the day. That's considered a bullish sign that could portend an end-of-year rally.
"Once these streaks of misery come to an end seemingly shows a mood improvement on the part of investors," said Paul Hickey at Bespoke Investment Management. "While the returns in the following week are mixed (+0.54%), over the next one, three, and six months, the S&P 500 has been higher eight out of nine times."
Volume was thin, with about 750 million shares changing hands on the New York Stock Exchange, but there was no effort during the day to sell into the rally. Breadth was strongly positive, with gainers beating losers 7 to 1, and there were 108 new highs against just 16 new lows.
In company news, investors are likely to watch shares of AT&T as the telecommunications giant announced late on Monday it was ending its deal to buy Deutsche Telekom's T-Mobile USafter opposition from the US government. Deutsche Telekom's shares were down in a rising market.
This marks the eight deal this year valued at more than $10 billion to fail, the most since 2008, according to Dealogic.
Competitor SprintNextel saw its shares move higher as well.
On the downside, software company Red Hat saw its shares slide following a disappointing earnings report after the closing bell Monday. The company's stock had surged 65 percent over the past two months.
Also, Research in Motion shares continued to tumble, with a regulatory filing showing the BlackBerry maker saw sales fall for a fifth straight quarter even as revenue increased by $1 billion.
Coal companies, which had been taking a beating with the rest of the energy complex, turned around, led by James River Coal.
Other asset classes reflected the risk-on trade in full effect: The yield on the benchmark 10-year Treasury note jumped to 1.89 percent, while the 30-year bond lost nearly 2 points in price. The US dollar tumbled against the euro , while oil and gold both saw substantial price gains.