Monday's Market: Stocks Close With Modest Gains

Updated from 4:05 p.m. EDT

After trading lower for most of the day, U.S. stocks moved up in the final hour of trading to close broadly higher, and almost every major sector ended with a gain. Volume was light to start the week.

The Dow Jones Industrial Average erased an earlier 116-point decline to end up 46.05 points, or 0.5%, to 8919.01. The Nasdaq rose 11.12 points, or 0.8%, to 1391.74, while the S&P 500 added 7.09 points, or 0.8%, to 947.95.

"This is a function of the rally that has been in place for the past four or five weeks," said John Hughes, a market analyst at Shields & Co. "I don't think there's too much out there in the way of negative news."

Hughes said while some investors remain cautious about the economic data due out this week, he believes that expectations are already "pretty low" and that stocks should trade sideways to slightly higher as the week progresses.

Coming up this week are consumer confidence numbers, personal income and spending, durable goods and revised second-quarter GDP figures.

"The popular thought is that everyone's on vacation," said Ben Hovermale, equity trader at Wells Capital Management. "It's hard to quantify what's going on when you don't have a lot of volume."

On the New York Stock Exchange, just 1 billion shares changed hands while 1.4 billion shares were traded on the Nasdaq. Breadth was positive, with advancers beating declines on the Big Board and the Nasdaq.

On the economic front, new home sales rose 6.7% to a record annualized rate of 1.02 million in July, above estimates for a reading of 975,000. Existing home sales were up 4.5% to a 5.33 million rate, in line with the projections.

Still, the data failed to have much impact, perhaps because investors felt that the numbers were unsustainable. Tom McManus, an analyst at Banc of America, said even if the consumer remains resilient and the economy doesn't slip back into recession, earnings growth could remain subpar this year.

Adding to the cautious tone throughout the day was a report from staffing firm Manpower, which showed that fewer employers are expecting to add jobs in the fourth quarter. Meanwhile, St. Louis Fed President William Poole suggested that the next move on interest rates could be a hike, not a cut as investors currently expect. He stressed the long-term health of the economy, including low inflation and rising productivity.

On the Dow, J.P. Morgan ( JPM), General Motors ( GM) and AT&T ( T) all tacked on 3%. Shares of Wal-Mart ( WMT) also rose even though the company said same-store sales in August were running at the low end of its 4% to 6% growth forecast.

United Technologies ( UTX), McDonald's ( MCD) and Disney ( DIS) were among the biggest Dow losers.

Disney fell 1% to $16.67 after ratings agency Fitch downgraded the company's credit rating. Fitch said Disney's acquisition of Fox family in October 2001 has hurt cash flow and added that attendance at the company's parks and resorts isn't rebounding. It also cited weakness at the firm's ABC network.

In the technology sector, networking stocks rose 5% on average, aided by an almost 6% jump in shares of Ciena ( CIEN). Ciena climbed to $4.39 after Soundview upgraded the stock to outperform from neutral, saying it expects the July quarter to be the low point in analysts' estimates. Several analysts cut their estimates on Ciena Friday, citing sluggish IT spending.

But Oracle ( ORCL) shed 2% to $10.57 after Sanford Bernstein cut its earnings per share estimates due to lower revenue expectations, primarily in applications and application servers.

"The technical picture remains constructive for stocks," said Ed Yardeni, chief investment strategist at Prudential.

Yardeni believes July's dive in the stock market was most likely an overreaction to WorldCom's accounting fraud but he said the market "remains as oversold and undervalued as it was in early July."

Among individual stocks Monday:

bebe stores ( BEBE) said it expects first-quarter earnings to be at or below the consensus due to lower-than-expected August and September same-store sales.

The company cited overall poor sales performance due in part to 20% lower inventory levels. bebe expects August same-store sales to be in the negative high-to-mid teens and September's to be in the negative mid-to-high single digits. The company previously forecast a rise in the low single digits. Separately, the company named Jamel Bennoui, former director of production and sourcing for Victoria's Secret.

Morgan Stanley lowered its investment rating on United Parcel Service ( UPS) to equal-weight from overweight, citing valuation concerns and a belief that the company has less upside potential than railroad and trucking companies. The shares were recently falling 91 cents, or 1.4%, to $64.37 and are trading at a price-to-earnings ratio of about 31.

Swiss food giant Nestle reportedly is offering $11.5 billion to purchase Hershey Foods ( HSY).

Nestle made a preliminary bid of $82 to $85 a share for the nation's No. 1 candy company after touring the company's factories and reviewing its finances, according to USA Today. The bid would represent a sweet premium on Hershey's Friday closing price of $75.03, which has since traded up 2.2% to $76.65.

The trust that controls 77% of Hershey's shares put the company up for sale a few weeks ago, and is likely to attract additional offers from Philip Morris' ( MO) subsidiary Kraft Foods and Britain's Cadbury Schweppes before a final decision is made. Hershey would qualify as Nestle's biggest acquisition to date, exceeding its $10 billion purchase of pet food manufacturer Ralston-Purina.

Accredo Health's ( ACDO) fourth-quarter earnings rose sharply from a year ago despite a big restructuring charge, easily beating First Call/Thomson Financial estimates. The addition of new products contributed to the company's increased earnings. Looking ahead, Accredo confirmed that it expects to have $1.45 billion to $1.5 billion in revenue for the year and an EPS of $1.87 to $1.97 a share.

Terayon's ( TERN) shares rose 27% Monday after Cox Communications ( COX) said it would use its TJ715 cable modem on its network and make Terayon its primary broadband vendor.

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