Stocks post strong gains on home prices, confidence

Trader Gregory Rowe works on the floor of the New York Stock Exchange on Tuesday, May 28, 2013.
AP Photo/Richard Drew

NEW YORK So much for "sell in May and go away." That old adage, based on investor behavior of many previous years, holds that stocks begin to swoon in the spring and remain sluggish during the summer. But with little time left in the month, it looks like this could be one year when the exception proves the rule, as promising economic news prompted investors to restart a rally that brought the market to record highs this year.

The Dow Jones industrial average climbed 106 points to 15,409, after surging as much as 218 points earlier as traders returned from the Memorial Day holiday. The yield on the 10-year Treasury note climbed its highest level in more than a year as investors moved money out of safe assets and into riskier ones like stocks.

The S&P 500 index rose 10 points to 1,660. The Nasdaq composite index climbed 29 points to 3,488.

Today marked the 20th straight Tuesday that stocks have posted a gain, according to Schaeffer's investment research.

Prompting the exuberance: U.S. home prices rose the most in seven years and consumer confidence reached a five-year high. The jump in home prices reinforced a theme that has been a major factor behind the 17 percent surge this year in the Standard & Poor's 500 index: a strong recovery in the housing market.

"They say the stock market tends to lead the economy. Now we're starting to see the improvement on the economic front, so there's some justification for this rally," said Ryan Detrick, a senior technical strategist at Schaeffer's investment research.

The market is coming off a rare loss last week. Traders worried that the Federal Reserve might slow its extraordinary economic stimulus measures, which have been another factor behind the stock market's advance this year. The Dow and the S&P 500 had their first losing weeks in a month.

Home builder stocks rose Tuesday after the Standard & Poor's/Case-Shiller survey, which was released before stock trading opened, found that U.S. home prices rose 10.9 percent in March, the most since April 2006. A growing number of buyers are bidding on a tight supply of homes.

Stocks extended their gains after the Conference Board reported at 10 a.m. that its measure of consumer confidence rose in May to its highest level since February 2008.

The Dow has advanced 18.2 percent this year and the S&P 500 index in 17 percent higher as investors have piled into stocks.

Unlike the first three months of the year, when the biggest gains were in large, stable companies like consumer staple makers that pay big dividends, in recent weeks investors have been bidding up the stocks of companies that have more to gain if the economy strengths. That shift out of lower-risk stocks and into more "cyclical" stocks, like banks and industrial companies, means investors are becoming more aggressive in seeking returns and more comfortable taking on risk.

Another bullish signal for the market is the strong growth in small-company stocks. Those stocks have a greater potential for growth but also tend to carry greater risk than large, diversified companies. The preference for small stocks was on display again Tuesday as the Russell 2000 index of small-company stocks rose 1.6 percent, more than other market indexes, to 1,000 points, a gain of 16 points. The index hasn't closed above 1,000 points before. Its year-to-date increase of 17.8 percent is one percentage point greater than that of the S&P.

In addition to the housing market recovery, stocks are also rising this year because of optimism that the economy is gathering strength as hiring picks up. Record company earnings and stimulus from the Federal Reserve have also helped send stocks higher.

Bond prices fell and their yields rose. The yield on the benchmark 10-year Treasury note rose to 2.11 percent from 2.01 percent late Friday. Markets were closed Monday for Memorial Day.

The longer-term outlook for bonds is bleak as rising inflation will eventually lead to higher interest rates, said Tim Courtney, chief investment officer at Exencial Wealth Advisors. Despite climbing this year, the yield on the 10-year note is still close to the record low of 1.39 percent that it reached in July, 2012, when demand for Treasuries surged as the European debt crisis intensified.

"The only way that bonds can make money from here is if we go a prolonged period of time with very, very low inflation and rates just don't move up a whole lot at all," said Courtney. "Under any other scenario they lose."

Among other stocks making big moves:

-Tiffany (TIF) rose $3.01 to $79.22 after the high-end jewelry seller said its first quarter net incomerose 3 percent as sales improved across all regions. The results beat the forecasts of Wall Street analysts.

-Tesla Motors (TSLA) jumped $13.22 to $110.30, a gain of 13 percent. Last week the electric car market raised almost $1 billion from a bond and stock offering and paid off a government loan nine years early. The company is also set to announce this week that it's adding to a network of car charging stations.

Traders were encouraged by gains in overseas markets. Japan's benchmark Nikkei rose 1.2 percent. The index had plunged 7.3 percent Thursday on concerns about Japan's massive economic stimulus program. European markets also rose. Britain's FTSE 100 jumped 1.8 percent and Germany's DAX gained climbed 1.4 percent.

In commodities trading, the price of oil rose $1.07, or 1.2 percent, to $95.24. Gold fell $7.80, or 0.6 percent, to $1,379 an ounce. The dollar gained against the euro and the Japanese yen.

That rally appeared to be faltering last week after the Dow Jones industrial average and the Standard & Poor's 500 index logged their first weekly losses in four weeks.

Traders were also encouraged by gains in overseas markets

Japan's benchmark Nikkei rose 1.2 percent. The index plunged 7.3 percent Thursday on concerns about Japan's massive economic stimulus program. European markets also rose. Britain's FTSE 100 jumped 2 percent and Germany's DAX gained climbed 1.6 percent.