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Stocks Log Gain, but Off Highs as Banks Drag

Published: Tuesday, 17 Jan 2012 | 4:17 PM ET

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By: JeeYeon Park
CNBC.com Writer

Stocks ended higher but off their best levels Tuesday as weakness in financials offset earlier optimism following a handful of better-than-expected global economic news and a successful Spanish debt auction.

Major U.S. Indexes

.DJIA

.NCOMP

.SPX

The Dow Jones Industrial Average added 60.01 points, or 0.48 percent, to close at 12,482.07, led by Merck [MRK Loading... () ] and Cisco [CSCO Loading... () ]. JPMorgan [JPM Loading... () ] was the biggest laggard on the Dow.

The S&P 500 rose 4.58 points, or 0.36 percent, to finish at 1,293.67, briefly hitting the psychologically-important 1,300 level earlier in the session. The Nasdaq gained 17.41 points, or 0.64 percent, to end at 2,728.08.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, ended above 22.

Among key S&P sectors, energy and techs finished higher, while financials fell into negative territory.

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“There’s been no volume—it’s all program trading,” said Alan Valdes, director of floor operations and VP of trading at DME Securities. “And once the S&P 500 touched 1,300, it was a big psychological resistance level and we’ve caved in.”

Among earnings, Citigroup [C Loading... () ] slumped after the banking giant's earnings fell well short of expectations on both profit and revenue, amid a wobbly beginning to earnings season for banks.

The report comes after JPMorgan's [JPM Loading... () ] earnings last week, which missed revenue expectations.

Meanwhile, rival Wells Fargo [WFC Loading... () ] turned in earnings that topped estimates as the bank set aside less money to cover bad loans.

“Banks' ability to generate profits will be impaired for some time and regulatory scrutiny will not go away anytime soon,” said Natalie Trunow, senior vice president and CIO of Calvert Investment Management.

Other financials giants including Goldman Sachs [GS Loading... () ], BofA [BAC Loading... () ] and Morgan Stanley [MS Loading... () ] are slated to post earnings throughout the week.

Kraft [KFT Loading... () ] advanced after the food producer said its fourth quarter earnings will top previously boosted estimates. In addition, the firm will be cutting about 1,600 jobs this year as the company splits into two.

Meanwhile, Sears [SHLD Loading... () ] surged to lead the S&P gainers following rumors that the retailer will be going private. The news comes after Eddie Lampert, chairman of Sears, added $130 million worth of shares to his personal holdings.

And Research In Motion [RIMM Loading... () ] rose again following further takeover rumors and market chatter that the BlackBerry maker may be selling one or more of its divisions.

On the economic front, a gauge of manufacturing in New York State rose to its highest level since April 2011, according to the New York Federal Reserve.

And overseas, China reported GDP growth slowed from its previous quarters, but still beat expectations.

“The recent U.S. economic data does not support the idea of a double dip—U.S. economy is on the mend, corporates are healthy and while consumers are not coming back very strongly, they are feeling better,” said Trunow. “Unless we have major blowups, we can withstand mild to more severe recession in Europe.”

Investors were also encouraged after a successful auction of Spanish short-term debt, in which demand was strong and yields halved. European shares finished sharply higher, hitting a five-month high.

Meanwhile, S&P downgraded nine euro zone countries, including France and Italy and the euro zone's rescue fund, the EFSF .

But some analysts told CNBC the downgrades were highly anticipated, despite knocking down stocks and the euro on Friday.

“You need confidence and that’s the big problem for average investors—nothing’s changed,” explained Valdes. “There’s still uncertainty in Europe and on our political front…I like our economic data and I think we’re trending up, but unemployment and housing still remain headwinds so it’s not all clear yet, but things are moving in the right direction.”

Carnival [CCL Loading... () ] plunged after analysts slashed earnings estimates and changed ratings on the cruise line company following the crash of one of its ships off the coast of Italy. Morgan Stanley lowered the stock to "equal-weight" from "overweight," and Barclays maintained its "overweight" rating but cut 2012 and 2013 EPS estimates.

Rival Royal Caribbean Crusies [RCL Loading... () ] also slumped amid worries the accident will impact industry sales.

In political news, Jon Huntsman dropped out of the race to become the Republicans' presidential candidate, endorsing Mitt Romney.

—Follow JeeYeon Park on Twitter: twitter.com/JeeYeonParkCNBC—

On Tap This Week:

WEDNESDAY: Weekly mortgage apps, PPI, industrial production, housing market index; Earnings from Goldman Sachs, Bank of NY Mellon, Northern Trust, PNC Bank, State Street, US Bancorp, Ebay
THURSDAY: CPI, housing starts, jobless claims, oil inventories; Earnings from BofA, Morgan Stanley, Sony Ericsson, UnitedHealth, AmEx, Google, IBM, Microsoft, Capital One
FRIDAY: Existing home sales; Earnings from GE, Schlumberger

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