Bargain Hunting Lifts Stocks; Cisco Recovers

U.S. stocks turned firmly higher Thursday afternoon as bargain hunters scooped up undervalued stocks following three straight down days. Bank and retail stocks advanced. Even battered tech Cisco recovered.

The Nasdaq bounced back from a wobbly morning after the tech gauge on Wednesday became the first major U.S. index to slide into bear-market territory. The Nasdaq closed at 2278.75, more than 20% below its Oct. 31 high. The Dow Jones Industrial Average and S&P 500 index also rose.

European stocks extended their earlier losses Thursday after the European Central Bank held interest rates at 4.0 percent and the Bank of England cut by another quarter point to 5.25 percent. Japan closed higher, while Australia declined. Most Asian markets are closed for the Lunar New Year Holiday.

Bank stocks, which have taken a pounding over the subprime mess and subsequent write-offs, were some of the day's biggest gainers. Notable advancers included J.P. Morgan, which xxx, Bank of Americaand Washington Mutual.

Cisco shares bounced back. After the closing bell Wednesday, the the networking-gear maker reported earnings in-line with estimates, but CEO John Chambers said in a conference call that, "It's the most cautious I've seen CEOs in the U.S. and Europe in many years," adding that, "We do think there is a very cautious attitude in the boardroom and that is different from six months ago."

Chambers's remarks echoed those he made in November about a dramatic drop in demand from banks. The stock has fallen about 28 percent since that time. On CNBC Thursday, however, the Cisco chief was more optimistic about business. The most pessimistic thing he said was simply that we're "in for some bumps."

"One of the things we do pretty well, is we catch market transitions," Chambers told CNBC. "We think it will be relatively short-term, whether that's a couple of quarters or up to a year remains to be seen. We think our strategy's in great shape. We think that it will be a relatively minor bump."

Tech stock Hewlett-Packard was the biggest drag on the Dow.

J.C. Penney, one of the top five gainers on the S&P 500, jumped 10 percent after the retailer reported a smaller-than-expected 1.9 percent drop in January same-store sales and raised its forecast for the fourth quarter.

Overall, retail stocks rallied despite weak January sales reports from major retailers.

"Many investors were sure the department stores would miss sales expectations," said Steve Neimeth, a portfolio manager at AIG SunAmerica. "Today's rally in the group may be a byproduct of short-sellers covering as a result that the news is finally out that sales are bad," he said.

Wal-Mart reported a lower-than-expected 0.5 percent increase in same-store sales. Such sales dropped 1.1 percent at rival Target . Gap sales fell 2 percent.

"The fact that the weakness in traffic got weaker in January than it was in December, you're going to have a first quarter that's probably more challenging than people expected," Dana Telsey, chief research officer at Telsey Advisory Group, in an interview on CNBC's "Squawk Box."

Reflecting the tentative nature of consumers amid all this recession talk, Costco , which sells wholesale food and other staples, saw same-store sales jump 7 percent.

Indeed, Neimeth said AIG SunAmerica is buying defensively. They're looking at General Mills and Anheuser-Busch, which are both trading at a discount and have growth rates of around eight to 10 percent, compared with roughly six percent for the market, Neimeth said.

AIG SunAmerica expects a very strong second half of 2008 and sees the potential for much better earnings in 2009 compared with 2008, so they're starting to look at consumer cyclicals, Neimeth said. His picks include American Eagle Outfitters and Phillips-Van Heusen, which may be down over the next couple of months amid weak sales numbers, but "have the potential to be up as much as 50 percent in the second half as consumer sentiment moderates, and possibly improves."

Home Depot was the biggest advancer on the Dow. The home-improvement chain recently sold 11 landscape-supply stores to a Florida developer fo $22 million. Last week, Home Depot said it was cutting 500 jobs at its Atlanta headquarters amid the housing slowdown.

Pending-home sales slipped 1.5 percent in December, a more-severe drop than the 1 percent economists had expected.

U.S. jobless claims fell by 22,000, lower than expected, last week, but the number of workers remaining on unemployment assistance rose to its highest level in more than two years, the Labor Department reported. The four week moving average rose to 335,000, below the key 350,000 mark. Anything above 350,000 is widely considered to be recessionary.

Given all the economic softness, the market widely expects the Federal Reserve to cut interest rates again when it next meets on March 18. The target for the federal-funds rate is currently at 3%.

"The market is a little like a spoiled kid," Bernie McSherry, a floor broker for Cuttone & Co. told CNBC. "They've gotten some candy and they want more of it -- they're demanding more of it -- from the Fed."

In politics, a stimulus package meant to help the economy rebound is facing delays as Senate Republicans blocked a bid by Democrats to add $44 billion in help for the elderly, disabled veterans, the unemployed and businesses to the House-passed economic aid package.

Standard & Poor's announced an overhaul packagefor the way it rates risk, hoping to fend off some of the criticism that ratings agencies were in part responsible for the subprime-loan debacle.