Stocks Gain, Led by Banks; Home Depot Rises

Stocks gained after a surprisingly upbeat report from the housing market and as a stream of stronger-than-expected retail sales reports signaled a bright start to the holiday season.

The positive tone comes a day after the market surged more than 2 percent, an unexpected rise jobless claims, and a lack of commitment from the European Central Bank on increasing government bond purchases.

The Dow Jones Industrial Average rose about 100 points, led by Home Depot, Microsoft , and Alcoa .

The S&P 500 and the Nasdaq both advanced. The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell below 20.

Among key S&P sectors, financials, industrials and consumer discretionary gained, while consumer staples fell.

After briefly moving higher, the dollar slipped against a basket of foreign currencies as the euro rose.

Wednesday's soaring market erased November's losses. But Mike Mussio, portfolio manager at FBB Capital Partners, said his firm will continue to recommend his clients—both individuals and smaller institutional investors—add to their stock holdings. On a relative basis, stocks still beat bonds and cash, he said.

The S&P 500, which broke through 1,200, the upper end of a resistance level, and was trading at about 1,215, should move higher, given the earnings power evident at corporations, Mussio said.

"Now 1,250 to 1,300 on the upper end doesn’t look all that unreasonable," he said.

The return of the consumer will be the main catalyst for the market through the end of the year, until companies can get more clarity about the direction of tax policy from the new Congress, Mussio said.

Signs the consumer is back was clearly evident Thursday asretailers posted better-than-expected sales for November. Shares of retailers were not universally higher, however, because many have posted strong gains in recent weeks on expectations of a bright holiday season.

Teen retailers Abercrombie & Fitch, Zumiez and Buckle had higher sales than expected as did LimitedBrands and Gap . Department stores also did well, including Nordstrom's , Macy's and JC Penney's .

Some retailers disappointed, including Aeropostale and Hot Topic .

Financial stocks gained after Goldman Sachs said "stronger economic growth, higher equity prices, and a more supportive interest rate environment are positive for many subsectors." For the financials overall, Goldman expects earnings-per-share will grow 24 percent next year, double the projected rate of growth for the S&P 500.

Specifically, Goldman raised Stifel Financial to "buy" from "neutral" and raised its price target to $65 from $60, citing its improved outlook for capital markets activity. Goldman added Principal Financial Group to its "conviction buy" list, and raised its price target to $32 from $31, citing improvement in the 401(k) market and the potential for the financial firm to buy back stock.

In other financial news, many big Wall Street banks were reportedly speaking with regulators to settle investigations into mortgage-backed securities transactions that were at the center of the financial crisis, according to the Wall Street Journal.

Morgan Stanley , JPMorgan and Goldman Sachs were all higher.

In earnings news, Collective Brands soared after reporting a surprise jump in third-quarter earnings. The owner of Payless ShoeShorce and Stride Rite said earnings rose 29 percent as overseas sales gained strength.

Meanwhile Kroger sank after cutting its profit and sales forecasts for 2010, despite improved sales in its latest fiscal quarter. Rivals Safeway and Weis Markets also fell, while Winn-Dixie and Whole Foods rose.

Luxury home builder Toll Brothers swung to a quarterly profit of 30 cents a share, well above a 68-cent loss for the same period in 2009. That news, combined with a positive plug from Goldman Sachs, lifted the sector. Rivals KB Home , Hovnanian and PulteGroup jumped.

Meanwhile, Pepsi was slightly lower after it agreed to buy 66 percentof Russian juice and dairy producer Wimm-Dill-Dann for $3.8 billion, pending government approvals.

Elsewhere, Merck said it would buy a privately-held biotech company that's working on a promising diabetes treatment. The purchase of SmartCells could be worth about $500 million.

And Johnson & Johnson was trading flat after news the drugmaker's Mylanta heartburn products were being recalled, the latest in a string of recalls for the company. The products, created through a venture with Merck, didn't note the products contained small amounts of alcohol.

Pending existing home sales gained 10.4 percentin October to 89.3 from 80.9 a month earlier, indicating problems with processing foreclosures didn't hurt activity, according to data from the National Association of Realtors.

Jobless claims rose 26,000, more than expected, to 436,000 for the week ended Nov. 27 from a revised 410,000 the week before, the Labor Department reported. The 4-week moving average moved down 5,750 to 431,000.

Investors were disappointed European Central Bank President Jean-Claude Trichet's declined to say the ECB would boost government bond purchases, but he said pointed out that he never said the limit of the European bond buying program.

Trichet spoke after the central bank unveiled its decision to leave rates unchanged. Markets are looking for clues on the bank's strategy regarding buying sovereign bonds from the euro zone. The ECB kept rates at a record low but could signal monetary easing ahead.

Also in Europe, Spain's Prime Minister Jose Luis Rodriguez Zapatero sought to reassure investors of the country's economic stability Wednesday. Zapatero said in a CNBC interview that the country's banking system was healthy.

A 2.468-billion euro bond sale in Spain was well-subscribed, though the 3.72 percent yield was far higher than a similar auction two months ago.

European stocks ended at two-week high after reports the ECB bought euro zone bonds, extending the previous session's gains, and Asian stocks ended higher thanks to the positive close on Wall Street.

In other U.S. economic news, the National Association of Realtors will release October pending home sales data at 10 a.m.

On Tap This Week:

FRIDAY: Employment situation, factory orders, ISM non-manufacturing index

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