U.S. Stocks Rall As Yields Fall

NEW YORK (MarketWatch) -- U.S. stocks rallied on Monday as a drop in bond yields and an upgrade of General Motors Corp. helped the market stage a rebound after selling off on Friday.

"The buyers came in right around key support levels," said Elliot Spar, market strategist at Ryan Beck & Co. "The rally in bonds, which looked like a flight to safety, was a plus for stocks."

The Dow Jones Industrial Average was up 106 points at 13,466, as 28 of its 30 components rose, led Altria Group Inc. , American Express Co. , McDonalds Corp. and 3M Co. .

General Motors Corp. rose 2.4%, after the U.S. automaker was upgraded to buy from neutral at Goldman Sachs, which said it was making a "tactical trading call" that shares will rise on expectations for sizable concessions from GM's unionized workers.

The S&P 500 gained 8.9 points to 1,511, while the Nasdaq Composite rose 10.8 points to 2,599.

After a sell-off last week, amid concerns about the subprime mortgage market and hedge fund woes, some strategists remain cautious about the market.

"Investors are beginning to look at the risks inside the markets and beginning to reprice various asset classes based upon the risks," said Paul Nolte, director of investments at Hinsdale Associates. "We expect many more large one-day moves in the weeks ahead, with a market that should soon begin to trend lower, if it has not yet."

On the broad market for equities, trading volumes showed 964 million shares exchanging hands on the New York Stock Exchange, while 1.2 billion traded on the Nasdaq stock market. Rising issues topped decliners by 17 to 15 on the NYSE and by 15 to 13 on Nasdaq.

By sector, banks , transportation and utilities led the gains, while oil services , gold and semiconductors were weak.

Yields and homes

The market, which has been pressured by rising bond yields over the past few weeks, saw some relief early Monday, as yields fell back. The benchmark 10-year Treasury bond was last up 8/32 at 95 11/32 in price, while its yield , which moves inversely, fell to 5.101%.

Higher yields provide a risk-free alternative to stocks while also lifting borrowing costs for consumers and businesses.

A report on May existing home sales report, along with weakness in global markets overnight, helped lower bond yields on Monday. Sales fell 0.3% in May to a seasonally adjusted annual rate of 5.99 million from 6.01 million in April.

While sales were stronger than the 5.90 million pace expected by economists, the inventory of previously-owned homes for sale rose to the highest level in 15 years, the National Association of Realtors reported Monday.

Shares of homebuilders fell, with the Philadelphia Housing Sector Index down 0.7%, led lower by Hovnanian , which reports earnings on Wednesday. Lennar Corp. , which reports Tuesday, and KB Home , which reports Thursday, also fell.

The housing data confirmed market expectations that the Federal Reserve, which meets on Wednesday and Thursday, will leave interest rates unchanged. Investors will still be eager to see if the committee's accompanying statement hints at whether rate increases or reductions could be in store in coming months.

Crude oil prices were off earlier lows, recently down 10 cents to $69.03, after news that a number of oil companies have reportedly refused Venezuela's terms on major oil projects. Crude rallied last week but turned lower early Monday as a strike in Nigeria ended.

Among oil stocks, BP Plc rose 1% even after news it has cut output by 10,000 barrels of oil a day at its Alaska Prudhoe Bay field a week ago following a small spill.

According to The Daily Telegraph, BP will incur a cost of $3.5 million as a result of the spill.

Subprime, hedge fund woes on backburner

Stocks took a heavy hit on Friday due to nervousness about a combination of rising Treasury yields, global interest rate and whether subprime lending woes have further to unwind. The Dow industrials dropped 185 points.

The equities market last week played off near collapses of two Bear Stearns Cos. hedge funds, among other factors.

"We appear to be looking in a 'glass half full' way at what caused the market to go down 2% last week," said Art Hogan, chief market strategist at Jefferies & Co.

"Equities are trying to adjust to higher yields," he said, referring to the fact that earlier in the month the yield on the 10-year Treasury note was driven above the federal funds rate, currently pegged at 5.25%, signaling expectations of higher rates.

"The stock market is trying to learn whether this points to growth or inflation," Hogan said. "If it is being driven by growth, then it is not a negative thing for stocks."

However, the Bank for International Settlements is sounding a cautionary note, according to a report on the Web site of the U.K.'s Telegraph newspaper.

The BIS is warning that years of loose monetary policy have helped pump up a dangerous credit bubble, leaving the global economy more exposed to a slump than is generally understood.

Shares on the move

Dow Jones & Co. remained front and center on investors' radar screens.

According to The Wall Street Journal's online edition there were "intense" negotiations over protecting the editorial independence of the Journal. The newspaper cited people familiar with the matter. Dow Jones is the publisher of both the Wall Street Journal and of MarketWatch.

Dow Jones' stock was down 1.7% at $57.81, below the $60-a-share buyout price offered by News Corp.
and Rupert Murdoch.

Drugstore and personal-products chain Walgreen's reported a 20% increase in profit, citing strong prescription drug sales.

Other markets

The dollar was steady while the yen remained under pressure, although there is growing talk of a possibility that the Bank of Japan may lift rates in the near future.

August gold fell $3.70 at $653.30 an ounce.

By Nick Godt