'Bernanke Rally' Lifts Banks, Indices

Updated from 3:28 p.m. EST

Financials led stocks in New York to a rebound session on Tuesday after Fed chairman Ben Bernanke allayed some concerns about bank nationalization and said the U.S. could see an economic recovery in 2010 if government is successful in restoring financial stability.

The Dow Jones Industrial Average rose 231.54, or 3.3%, to 7346.32. The S&P 500 was bettered by 29 points, or 3.9%, to 772.33. The Nasdaq tacked on 51.26, or 3.7%, to 1438.98.

Tech held up and banks rallied, with Citigroup (C Quote) and Bank of America(BAC Quote) rising 20% and 16%, respectively, and the KBW Banking index up some 13%, with financials outperforming the market. General Motors (GM Quote)led the Dow with a 22% increase.

Investors were tuned to Washington, as Federal Reserve Chief Ben Bernanke gave a testimony on monetary policy.

Among other things, the Fed chief elaborated a bit on the so-called "stress test," an aspect of the Treasury's financial stability plan, which will look at the balance sheets and capital needs of the largest 19 banks over the next few years under the consensus economic forecast and also an alternative, meaning worse, situation.

The stress test will establish how much capital a bank will need to lend and support the economy, so that even if the bad scenario occurs, it will have enough equity to meet its obligations, said Bernanke. Key was that Bernanke said the capital will be provided in convertible preferred shares, so that the bank can convert the preferred to common only if losses warrant it.

"It seems like he gave some guidance that seemed to take away some concern about nationalization of the banks, in the sense that a lot of those concerns were around those 'stress tests' -- concern that the government might force capital on them and dilute shares," says Bill Stone, Chief investment strategist, PNC Wealth Management.