Stocks closed sharply higher after Standard & Poor's reaffirmed the triple A ratings on two big bond insurers, sparking an explosive rally.
The Dow Jones Industrial Average closed up nearly 190 points after S&P took MBIA, the nation's biggest bond insuer, off its CreditWatch for a ratings downgrade. The Nasdaq and Standard & Poor's 500, which had been languishing around breakeven, also posted strong gains.
S&P said in a note that the move on MBIA was "a strong statement of management's ability to address the concerns relating to the capital adequacy of the company."
The news came as speculation over troubled bond insurer Ambac's fate centered on a recapitalization plan for the troubled insurer. There was some skepticism of whether the deal would be completed, but Ambac's shares turned positive after the head of investment banking at Allianz's Dresdner Bank said the bank plans to support a rescue package.
S&P also reaffirmed Ambac's triple A rating but could downgrade the insurer pending a review of the proposed recapitalization plans.
Stocks spent most of the day in positive territory, after the National Association of Realtors said sales of existing homes fell to an annual rate of 4.89 million units, numbers that, while weak, were not as bad as analysts had expected and showed that the market may have hit a plateau.
But additional tremors from the financials, including a warning from Fitch Ratings that large banks could suffer lower ratings because of exposure to bond insurers, caused worries on Wall Street.
"Everybody is concerned about another shoe to fall," said Nadav Baum, managing director of investments at Pittsburgh-based BPU Investment Management. "Until we can really get some transparency with what's going on with the subprimes and all these recessionary fears, you're going to have a choppy market. It needs to get some footing, it needs to get some direction."
Stocks were riding a wave, albeit a volatile one, on deal news, the biggest of which involved Take-Two Interactive Software , which publishes the widely popular "Grand Theft Auto" video game. Video game giant Electronic Arts made an unsolicited $1.9 billion offer to buy Take-Two, which escalates the competition with Activision to buy the company.
Take-Two soared even though the company rejected the EAS offer. Electronic Arts, meanwhile, was the biggest loser on the S&P 500.
Getty Images gained sharply on news that the Seattle-based seller of stock photography and video footage agreed to a deal that would take it private for just more than $2 billion.
And in another piece of deal news moving the market, Alcoa led gainers on the Dow blue-chip index on news that it agreed to sell its packaging unit to the Rank Group of New Zealand for $2.7 billion.
On the down side, a number of large banks lowered their earnings projections, and shares across the sector moved lower, led by Citigroup . Goldman Sachspredicted writedowns of $1 billion to $12 billioneach for its competing brokerages, with Citi expected to take a hit at the high end of that number.
Financials were the leading drag on the Dow, with Citi joined by JP Morgan Chase as financials taking a hit.
Airline stocks also were down as fears spread that a merger Delta Air Lines and Northwest Airlines was in danger of falling apart.
In earnings news, home improvement retailer Lowe'sreported lower fourth quarter earningsof 28 cents a share that nonetheless beat revised Wall Street expectations.
Genentech reported accelerated government approval for its Avastin breast cancer drug and its shares gained nearly 10 percent early. The sector gained more than 3 percent in the first hour of trading.
Also, Visa was preparing what could be the largest initial public offering ever, with the world's biggest credit-card network indicating it may raise up to $18.8 billion in the eagerly awaited entry to the market.
Industrial conglomerate Siemens saw its shares slip after the Munich company announced it would slash 7,000 positions at its corporate telecommunications unit, Siemens Enterprise Networks.