Updated from 4:05 p.m. EST

Stocks in the U.S. reversed early losses Thursday and closed to the upside as buyers looked past weak economic data and poured money back into the battered financial sector.

After falling close to 200 points earlier, the Dow Jones Industrial Average turned around and rose 207.53 points, or 1.67%, to 12,650.36. McDonald's ( MCD) and Home Depot ( HD) were the best performers on the index, each rising more than 4%.

The Real Story Wrap, January 31

Similarly, the S&P 500 and the Nasdaq Composite retraced losses and moved into the black. The S&P 500 gained 22.69 points, or 1.68%, to 1378.50, and the Nasdaq advanced by 40.68 points, or 1.74%, to 2389.86.

While stocks managed to reverse their initial losses, the day marks the end to a gruesome month for equities. The Dow fell 4.6%, the S&P 500 lost 6.1%, and the Nasdaq gave back a whopping 9.9% in January.

"This could just be a technical bounce, as stocks have been so beat up this month," said Edgar Peters, chief investment officer with Pan Agora. "This could also be a delayed reassessment to the Federal Reserve's rate cut yesterday."

The financial sector lead the market's turnaround. The Amex Securities Broker/Dealer Index climbed 3.3%, the Nasdaq Financial 100 Index was up 3%, and the NYSE Financial Sector Index rose 1.3%.

Among individual names, Citigroup ( C), Goldman Sachs ( GS), and Bear Stearns ( BSC) all finished in positive territory after starting in the red.

"Financials and consumer discretionary have been particularly strong on down days, and that's a good indicator for the broad market over the near term," said Steven Sheldon, principal with SMS Capital Management. "Sentiment has been weak, but now money is looking for places to go as stocks stabilize."

The strength in financials pushed market breadth to the positive side. On the New York Stock Exchange 4.87 billion shares changed hands, as advancers beat decliners 3 to 1. Volume on the Nasdaq reached 2.81 billion shares, with winners topping losers by a 2-to-1 margin.

Stocks had opened weaker after the Labor Department said initial jobless claims soared by 69,000 last week to 375,000, a troubling sign for employment strength a day ahead of the government's January nonfarm payroll numbers.

Investors will be looking for more clarity in that report, because the claims also follow on the heels of stronger-than-expected jobs data from ADP, meaning the picture has been a bit muddied going into Friday.

"There is nothing in the argument that the dip in claims late in December and early January is a sign that the labor market is OK," said Ian Shepherdson, chief economist with High Frequency Economics. "We think the underlying trend in claims is about 350,000 but, the drop in the Institute for Supply Management index means it is set to rise further."

U.S. Treasury prices rallied on the data. The 10-year note was up 15/32 in price, yielding 3.61%. The 30-year bond added 27/32 in price to yield 4.34%.

Traders were also focusing on bond insurers after MBIA ( MBI - Get Report) said that it had a writedown of $3.5 billion in the fourth quarter, leading to a loss of more than $2 billion.

During the previous session, a rally that followed the Federal Reserve's decision to cut interest rates ended abruptly after Fitch downgraded bond insurer FGIC to double-A from triple-A.

The triple-A ratings are key to the insurers' ability to write new business, and any downgrades would also likely cut the ratings on securities that are already insured. In turn, that could have the ripple of effect of forcing writedowns by companies that currently own the instruments.

MBIA and competitor Ambac Financial ( ABK) opened sharply lower but finished 11% and 6.8% higher, respectively.

Following the last close, Amazon.com ( AMZN - Get Report) beat estimates for the fourth quarter as sales rose 42%. Despite concerns over shrinking margins, shares turned higher by $3.49, or 4.7%, to finish the day at $77.70.

Also late in the day, Starbucks ( SBUX - Get Report) said it struggled in its fiscal first quarter, although it topped estimates by a penny. The company also said it will close 100 weak performing stores and open 425 fewer domestic locations. Shares slipped 31 cents, or 1.6%, to $18.91.

Ahead of the new session, Procter & Gamble ( PG - Get Report) topped expectations on both the top and bottom lines for its fiscal second quarter, but the company offered guidance that is below the Thomson First Call estimate. Still, P&G was up 47 cents, or 0.7%, to end at $65.56.

Elsewhere, Colgate-Palmolive ( CL) said it beat the consensus forecast when one-time charges were stripped out, as the company benefited from a weak dollar and overseas sales. Colgate climbed $3.19, or 4.3%, to $76.69.

CVS Caremark ( CVS) moved higher on a fourth-quarter profit that almost doubled from a year ago, thanks to the company's acquisition of Caremark. CVS jumped $2.91, or 8.1%, at $38.93.

Raytheon ( RTN) and Burger King ( BKC) also had stronger-than-expected quarterly results. Shares of Raytheon added 2.7%, and Burger King rose 7.4%.

The Philadelphia Housing Sector Index jumped 7.2%, supported by a 20.3% surge in shares of Pulte Homes ( PHM). The homebuilder was rallying even after it posted a worse-than-expected fourth-quarter loss.

Google ( GOOG - Get Report), Altera ( ALTR) and Electronic Arts ( ERTS) were posting quarterly results following the close. Google slumped 8% in extended trading after its results fell short of expectations.

In other economic news, the Commerce Department said personal income rose 0.2% in December while spending rose 0.5%. The core personal consumption expenditures price index -- a favorite inflation measure for the Fed -- rose 2.2% over the last year, slightly outside the central bank's so-called comfort zone.

Meanwhile, the Chicago purchasing managers' index slid to a reading of 51.5 in January from 56.4 in December. Economists were expecting the index to come in at a reading of 52.

Commodity prices were mixed for the session. Crude oil fell 58 cents to $91.75 a barrel, while gold futures added $1.70 to close at $928 an ounce.

Overseas, Hong Kong's Hang Seng dropped 0.8%, while Japan's Nikkei 225 rose 1.9%. Among European bourses, London's FTSE 100 added 0.7%, and Germany's Xetra Dax fell 0.3%.