Sign of Hope Lifts Wall Street

Updated from 4:10 p.m. EDT

Stocks erased their early losses and closed higher Thursday afternoon as a hopeful report from Standard & Poor's countered more disappointing economic data and the dollar's continued spiral southward against the euro and yen.

The Dow Jones Industrial Average, down more than 200 earlier, closed up 35.50 points, or 0.3%, to 12,145.74. Over the course of the session, the index traded in a range of 340 points.

The S&P 500 ended up 6.71 points, or 0.5%, at 1315.48, and the Nasdaq Composite surged 19.74 points, or 0.8%, to 2263.61.

U.S. shares had a rough morning, but the mood changed dramatically after S&P said "the end of writedowns is now in sight" for large financial firms. While S&P raised its view that subprime-related writedowns will probably reach $285 billion, or $20 billion more than its prior expectation, the thought that the worst could be over was what investors were focusing on.

The report also put forth the opinion that, globally, financials appear to have already written down the majority of their deteriorated subprime securities.

"That's the kind of news the market wants to see, whether it's real or not," commented Paul Mendelsohn, chief investment strategist with Windham Financial.

Indeed, breadth turned solidly positive following the report. Roughly 5 billion shares changed hands on the New York Stock Exchange, and around 2.42 billion on the Nasdaq, as winners outpaced losers 3 to 2.

"The volatility in this market is staggering, both positive and negative," said Mendelsohn.

Marc Pado, U.S. market strategist with Cantor Fitzgerald, believes that the S&P was effectively telling banks what they need to do during the fast-approaching earnings season -- take writedowns, be done with the egregious bad assets, and claim a fair value on them so as to eliminate the uncertainty that has been plaguing the market of late.

Big financials such as Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) and Citigroup (C Quote - Cramer on C - Stock Picks) have taken billions in losses as the value of some of their riskier holdings plunged in recent months. Worries about a variety of bonds has been building for months, and the market overall has suffered as traders struggled to get a handle on just how bad things could get.

For now, there was a ray of light, and the financials got a lift. The Amex Securities Broker-Dealer Index closed up 1%, the KBW Bank Index rose 0.4%, and the NYSE Financial Sector Index added 0.1%.

Pado also believes that some of the upturn owed to a proposal from Congressman Barney Frank, which would allow the Federal Housing Administration to guarantee some refinanced mortgages in order to "stem the significant rise in mortgage foreclosures."

"That could have been a more political comment than anything, but it's at least an acknowledgement of the depth of the problem, as much as you might not like the solution," said Pado. He noted that many people have been opposed to an outright government bailout.

Treasury Secretary Henry Paulson, speaking on the subprime disaster, called for tougher oversight of mortgage lenders, including enacting strong national licensing standards for mortgage brokers.

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