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Bulls on Loose in New Year

NEW YORK ( TheStreet) -- Stocks posted strong gains of roughly 1% during 2011's first trading session as promising manufacturing and construction data bolstered confidence in the U.S. economy's recovery prospects.

The bullish action in equities was a strong sign the January Effect is poised to be a factor this year, despite double-digit percentage gains for all three major U.S. equity indices in 2010.

The Dow Jones Industrial Average rose 93 points, or 0.8%, to close at 11,671. The S&P 500 added 14 points, or 1.1%, to finish at 1,272, and the Nasdaq Composite closed higher by 39 points, or 1.5%, at 2,692.

Financial stocks led Monday's broad rally with Bank of America (BAC - Get Report) and JPMorgan Chase (JPM - Get Report) topping the Dow alongside Alcoa (AA - Get Report). Exxon Mobil (XOM) was also a standout, finishing the session up by 2%.

Intel (INTC), Coca-Cola (KO), McDonald's (MCD - Get Report) and General Electric (GE - Get Report) were the only Dow components to close in negative territory.

Trading volume strengthened from levels seen in 2010's final sessions with 1.1 billion stocks trading on the New York Stock Exchange and 1.9 billion shares changing hands on the Nasdaq. Breadth was clearly weighted to the positive with 72% of stocks posting gains and 25% losing ground.

The strong start to the new year was fueled by two encouraging economic reports. The Institute for Supply Management said Monday morning that manufacturing activity continued to trend up in December . The purchasing managers' index rose to 57%, up from 56.6% in November. Economists had forecast the ISM Manufacturing Index to rise to 57.3, according to consensus estimates from Briefing.com.

The Commerce Department also reported a 0.4% rise in construction spending for November. Spending was expected to rise 0.2% after ticking up 0.7% in October, according to Briefing.com.

"The market has been rising in anticipation of all this good news," said John Canally, economist of LPL Financial. "In order to stay here, we need to build on that. ...We need to see job growth at 200,000 to 300,000 in the next few months and jobless claims below 400,000 for the next several weeks. Otherwise, the markets will conclude that 'yes, there is manufacturing growth but it is not translating to jobs,' " he said.

Canally expects the positive momentum to continue in the near term in light of the recent burst of positive economic data. Still, he does not rule out bad news after a tumultuous 2010. "Most of the landmines for 2011 we have not even thought about yet."

Traders

Data from China over the weekend showed manufacturing activity in the world's fastest-growing economy slipped for the first time in five months. The slowdown lifted hopes that China will not take additional steps to curb inflation by again raising interest rates.

The optimism about the U.S. economic outlook brightened commodities as well as copper and oil hit new highs on Monday but pared gains by the end of trading. The February crude oil contract added 17 cents, or 0.2%, to settle at $91.55 a barrel. Oil futures rose 15% in 2010. Analysts are projecting crude oil prices to hit $100 a barrel by the end of 2011. Copper futures for March delivery gained 1 cent to settle at $4.4575.

Gold and silver prices took a breather as concerns over China's inflation abated and risk appetite returned. The February gold contract rose $1.50, or 0.1%, to settle at $1,422.90 an ounce.

Shares of Bank of America jumped 6.4% to $14.19. The bank said it will take a $2 billion charge in its fourth quarter as it settles buyback claims on home loans sold to Fannie Mae and Freddie Mac.

Consumer products giant Clorox (CLX) shed 2.7% to $61.57 after it issued a weak outlook for the fiscal second quarter. The company sees sales down 3% to 4%.

Analyst ratings changes were influential on Monday. Among stocks that rose on upgrades were the previously mentioned Alcoa and Office Depot (ODP). Alcoa's stock gained 2.7% to $15.80 after Deutsche Bank raised its rating to buy on strong aluminum prices and raised the price target on the stock to $22. Office Depot's stock rose 8% to $5.83 after Janney Montgomery Scott lifted its rating to buy.

Meantime, shares of DryShips (DRYS) dropped 5.5% to $5.19 after Morgan Stanley cut its assessment of the stock to underweight while shares of Ann Taylor (ANN) lost 5.4% to $25.92 following a Piper Jaffrey downgrade to neutral.

Global stocks rallied on Monday. Hong Kong's Hang Seng gained 1.7%. Japan's markets were closed. In Europe, Germany's DAX finished higher by 1%. Markets were closed in Britain.

The euro slipped against the dollar, weakening to $1.3355 from $1.3370. The dollar was trading slightly higher against a basket of currencies, with the dollar index up 0.3%.

The benchmark 10-year Treasury note was down 13/32, raising the yield to 3.338%.

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-- Written by Shanthi Bharatwaj and Melinda Peer in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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