Financials Take Stocks Higher

Updated from 4:10 p.m. EST

Stocks in the U.S. powered higher Monday as traders shook off worries about a worldwide economic slowdown, mixed earnings news and dour housing data.

After falling as many as 92 points, the Dow Jones Industrial Average reversed ground and closed ahead by 176.72 points, or 1.45%, to 12,383.89. The S&P 500 added 23.36 points, or 1.76%, to 1353.97, and the Nasdaq Composite was up 23.71 points, or 1.02%, at 2349.91.

Volume and breadth were strong to start the week. About 3.55 billion shares changed hands on the New York Stock Exchange, with advancers topping decliners by a 3-to-1 margin. Volume on the Nasdaq reached 1.94 billion shares as winners outpaced losers 5 to 3.

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The embattled financial sector coupled with utilities to turn the major averages around. The Amex Securities Broker/Dealer Index rose 3.8%, and the NYSE Financial Sector Index jumped 2.6%. The Dow Jones Utility Average gained 1.4%, and the Philadelphia Utility Sector Index climbed 1.3%.

Earlier, the major averages hit session lows after a greater-than-expected 4.7% drop in new-home sales for December. For all of 2007, sales of new dwellings fell a staggering 26.4%.

"It's maintaining the theme that housing hasn't turned around and isn't likely to any time soon," said Paul Nolte, director of investments with Hinsdale Associates. "We're going to have issues with housing for quite some time."

Ian Shepherdson, chief economist with High Frequency Economics, said the downside for the sector remains considerable. "There is no sign of a bottom in any of these data," said Shepherdson. "There is no sign yet of an end to the decline in activity, and prices are collapsing, down 10.4% year over year."

Following the report, the Philadelphia Housing Sector Index slumped before surging 4.2% higher. Hovnanian (HOV Quote), Toll Brothers (TOL Quote), Beazer Homes (BZH Quote) and Centex (CTX Quote) all finished in positive territory after initially falling on the data.

The housing numbers kick off a data-heavy week, with reports on gross domestic product, durable-goods orders, consumer confidence and the all-important nonfarm payrolls report due in the coming days.

"This week we'll get confirmation of the overall weakness in the economy," said Nolte. "The only way psychology will change is if there are any outliers in these data. Other than that, there won't be any reconsideration of how fast the Federal Reserve should move."

The U.S. averages opened the day with losses following weakness in overseas markets. Overnight in Asia, Hong Kong's Hang Seng slumped 4.3%, and Tokyo's Nikkei plunged nearly 4%. The downturn continued when Europe's main markets opened, with the FTSE in London down 1.3%, the Paris Cac 40 off 0.6% and the Frankfurt Dax lower by 0.1%.

With worries growing that a U.S. recession is leading to a global downturn, traders have been on edge for months. This week, investors will be closely watching the Fed, who will be holding a two-day policy meeting. Many observers are looking for another reduction in the fed funds rate.

Less than a week ago, the Fed took the unusual step of making a 75-basis-point cut before its regularly scheduled meeting. The central bank said it made the move in light of a "weakening economic outlook and increasing downside risks to growth."

Jason Pride, director of research with Haverford Investments, said that the Fed should cut by 50-basis points when it issues its policy statement, as anything less would be a disappointment.

"We don't know what the Fed is going to do, but we certainly know what the Fed should do," said Pride. "For the first time in this period, the Fed needs to establish itself as being ahead of the curve. Trading is likely to remain choppy until then, but the market is pricing in a reasonable amount of concern."