U.S. Stocks Rise As Oil Backs Off Highs, Yields Stabilize

NEW YORK (MarketWatch) -- U.S. stocks rose in volatile trade on Thursday, as crude oil prices retreated from previous highs helped to offset concern about higher bond yields, which yesterday led the Dow Jones Industrial Average to stumble nearly 150 points.

"We're seeing a bit of a bounce after the sell-off yesterday," said Art Hogan, chief market strategist at Jefferies & Co. "Let's just hope that it's not a dead-cat bounce."

Adding volatility in the market was the rebalancing of the Russell indices, including the Russel 3000 index of small-cap stocks, Suskind said.

After gyrating in and out of positive territory, the Dow industrials was last up 55 points at 13,543, as 21 of its 30 stocks retreated, led by the likes of Caterpillar Inc. , McDonald's Corp. , Honeywell Corp. and Wal-Mart Stores retreated.

Investors seized on a reprieve in oil prices to seek out bargains. Crude oil recently gained 10 cents to $68.98, after earlier trading as high as $69.88, as a general strike in Nigeria fueled concerns about oil production. But a barrel recently gained 25 cents to $68.61 a barrel.

"But the oil sector is providing some help, and so crude oil is more constructive today than it was yesterday," Hogan said. Exxon Mobil remained the biggest gainer among blue chips, gaining 1.6%.

The S&P 500 index fell 6.8 points to 1,519, while the Nasdaq Composite gained 12.9 points to 2,612.

Trading volumes showed 1.1 billion shares exchanging hands on the New York Stock Exchange and 1.4 billion trading on the Nasdaq stock market. Declining issues topped gainers by 17 to 15 on the NYSE and by 15 to 14 on the Nasdaq.

By sector, utilities , airlines and broker/dealers led the declines, while oil , natural gas and semiconductors .

Hedge fund woes

Morning action saw investors grow concerned that the meltdown in the U.S. subprime mortgage market might cause more trouble for hedge funds. The Wall Street Journal reported that the collapse of two big Bear Stearns hedge funds marks a test of the resiliency of the financial markets.

"People are wondering where the supbrime derivative tentacles are going to end up," said Jay Suskind, director of trading at Ryan, Beck & co.

On Thursday, JP Morgan Chase , a Dow component, said it came to terms with Bear Stearns, and didn't auction the collateral it held from a Bear hedge fund, a person briefed on the matter told the newspaper.

Yields back in focus

The market tumbled when yields rose on Wednesday.

And slight weakness persisted Thursday, after the day's data did little to change the market's expectations of a bounce in economic conditions in the second quarter.

The benchmark 10-year Treasury bond was last down 2/32 at 95 2/32, sending its yield down to 5.143%.

The Philadelphia Federal Reserve said its diffusion index rose to 18.0 in June from 4.2 in May. Readings over zero indicate expansion. The increase was much larger than expected. Economists were expecting the index to rise to 8.0, according to a MarketWatch survey.

Earlier, the Labor Department reported that U.S. jobless claims reached their highest level since April, rising 10,000 to 324,000 in line with expectations.

Investors are focusing more and more on possible inflationary pressures coming from the labor market, which might prevent the Federal Reserve from cutting interest rates this year and, according to some, might lead the Fed to raise rates.

Bonds, which lose value when inflation rises, have been under pressure for several weeks amid signs of rising inflation globally. U.S. bond yields, which move inversely to price, have topped 5%, offering a risk-free alternative to stocks and lifting borrowing costs for consumers and businesses.

Stock movers

Of companies in focus, the board of Dow Jones said it was taking over negotiations with News Corp over a proposed $5 billion buyout fom the Bancroft family that holds a controlling stake in the publisher of The Wall Street Journal. Separately, MySpace founder Brad Greenspan said he's willing to pay $1.25 billion for 25% of Dow Jones shares in a tender offer, with Greenspan saying he could boost traffic to Dow Jones Internet properties. Dow Jones is the owner of MarketWatch, the publisher of this report.

Luxottica agreed to buy Oakley for $2.1 billion, or $29.30 a share, an 18% premium to Wednesday's close.

H&R Block reported a loss and forecast current year earnings per share to be below analyst expectations.

Handset maker Nokia fell after it was downgraded to neutral from buy at Goldman Sachs, citing a more balanced risk/reward following a recent strong run.

By Nick Godt