Dow Soars in Wide Rally

The market bounces back from an off week as the Dow rises 235 points. Financials and home-improvement stores set the market pace. Frank Curzio recaps the action in The Real Story (above).
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Updated from 4:24 p.m. EDT

The major indices in New York gained around 3% each with some help from

Bank of America

(BAC) - Get Report

and home-improvement company

Lowe's

(LOW) - Get Report

and after some brightening in homebuilder sentiment.

The

Dow Jones Industrial Average

rose 235.44 points, or 2.9%, to 8504.08, while the

S&P 500

added 26.83 points, or 3.04%, to 909.71. The

Nasdaq

finished higher by 52.22 points, or 3.1%, at 1732.36.

Financials led the advance, with the KBW Bank Index gaining 7.5%, and Bank of America and

American Express

(AXP) - Get Report

shares up 9.9% and 7.8%, respectively, as the top gainers on the Dow.

JPMorgan Chase

(JPM) - Get Report

tacked on 6.7%.

Home Depot

(HD) - Get Report

and

General Motors

(GM) - Get Report

also boosted the Dow, gaining 6.6% and 8.3%, respectively.

The optimism comes after the major indices closed the previous week with losses. "It is just the nature of the beast in that most participants 'missed' the lows, have been sitting with too much cash, and are now forced by the performance derby to commit that cash, which is why the 'dips' are being bought," writes Jeffrey Saut, Raymond James chief investment strategist.

Observers, still unsure of whether last week's "breather" indicates a change of pace, are keeping a cautionary tone.

"So the selloff didn't come on good volume, and sentiment is getting pretty bullish," says Paul Nolte, director of investments at Hinsdale Associates. "You're not seeing a lot of short-selling going on in the marketplace, investor sentiment readings are above average, and there is a high level of confidence in the idea that we're going to snap back from one of the worst banking crises in 80 years within a fairly short period of time -- all right, well, 'Happy days are here again.' But I'm not convinced that's the case."

From a technical perspective, markets turned down "somewhat convincingly" from their 200-day moving averages, and earnings have declined by 90% since their peak in October 2007, says Nolte. How those earnings rebound is going to be key.

A rise in Bank of America gave a boost to financials after Goldman Sachs added the bank to its conviction buy list. Goldman Sachs analysts said in a report that the stock has underperformed since the stress-test announcement, in part due to uncertainty around share count, as well as selling pressure from Bank of America's ATM (at the market) capital raise, but they expect those pressures "may abate."

Lowe's was up 8.1% after it reported a better than expected

first-quarter profit

. Earnings were still down from a year ago, but the company reported growth in market share and margin growth and raised its second-quarter and full-year guidance.

Competing home-improvement chain Home Depot is slated to report earnings on Tuesday.

More clues on the health of the housing sector came from the National Association of Home Builders (NAHB), which said the NAHB/Wells Fargo index rose to 16 in May from 14 in April. A rating of 50 would indicate an even number of positive and negative responses from homebuilders. Although still registering a majority of negative responses, it's the second consecutive month of improvement for the index and represents the highest reading since September.

Data on housing starts and building permits will be released Tuesday.

Outside of housing,

State Street

(STT) - Get Report

said early Monday that it

plans to offer

stock and issue senior notes to help repay the $2 billion in government loans received through the Treasury's Capital Purchase Program.

Meanwhile,

American International Group

(AIG) - Get Report

said it will spin off its life insurance unit in order to repay some of its government loans. Shares of American International Assurance Co., or AIA Group, will be traded on an Asian exchange.

AIG's shares were 6.4% higher, while State Street advanced 8.5%.

Stocks overseas were mixed. In India, the Bombay Stock Exchange Sensitive Index (Sensex) surged 17.4%, a point that triggered a halt in trading, after an election victory for the Congress-led United Progressive Alliance.

In Europe, London's FTSE 100 and Frankfurt's Dax were higher by 2.3% and 2.4%, respectively. In Asia, the Nikkei in Japan was down 2.4%, but the Hang Seng in Hong Kong was higher by 1.4%.

The dollar was recently weaker vs. the pound, euro and yen. Longer-dated Treasuries were falling, with the 10-year down 24/32, to yield 3.22%, and the 30-year off by 1-23/32 to yield 4.18%.

Crude oil surged $2.69 to settle at $59.03 a barrel, while gold fell $9.60 to $921.70 an ounce.