Markets end higher ahead of holiday

NEW YORK (CNNMoney.com) -- Stocks closed higher Monday afternoon, at the end of a half-day, as investors cheered news from Merrill Lynch and worried that last-minute holiday shoppers may not have pulled through for retailers.

The Dow Jones industrial average (INDU), added 0.7 percent. The broader S&P 500 index (SPX.X) rose 0.8 percent and the tech fueled Nasdaq (COMPX) gained 0.8 percent.

Trading volume was light Monday as markets closed early. They will remain closed Tuesday for the Christmas holiday.

"The big news of the day are these investments in investment banks by sovereign wealth funds," said Brian Gendreau, investment strategist at ING Investment Management.

Merrill Lynch (MER, Fortune 500), which has been battered by the credit crisis, announced early Monday that it will sell a $4.4 billion stake to Temasek Holdings, Singapore's state-owned investment company, and $1.2 billion to a U.S. advisory firm.

In recent weeks, a number of big Wall Street investment banks - including Morgan Stanley (MS, Fortune 500), Citigroup Inc (C, Fortune 500) and UBS AG (UBS) - have received capital infusions from foreign government investment entities to help offset subprime related losses.

And the markets appear to be reacting favorably to the trend.

"The financials are leading the way today...suggesting that the market is seeing some buying opportunities there," notes Gendreau.

Shares of Merrill Lynch ended a little over 2 percent lower as investors took a closer look at the deals which the company announced earlier in the session. Merrill shares were up nearly 4 percent in early trading.

A Wachovia (WB, Fortune 500) analyst lowered his earnings forecast for Merrill Lynch Monday morning, warning that more writedowns could be in store for the company that has already reported close to $8 billion in losses due to souring mortgage backed securities.

Merrill Lynch also announced Monday that it will sell its commercial finance unit, Merrill Lynch Capital, to the finance branch of General Electric. Terms of that deal were not disclosed. Shares of General Electric Co (GE, Fortune 500). rose 2 percent on the news.

Other financials like Citigroup, Lehman Brothers (LEH, Fortune 500) and JP Morgan (JPM, Fortune 500) were able to hang on to gains.

In other news, retailers are jittery as the pre-holiday shopping frenzy seems poised to fizzle out. Retailers' hopes for a strong holiday shopping season were high as a report pointed to stronger consumer confidence than previously thought.

In corporate news, consumer electronics retailer Circuit City (CC, Fortune 500), which reported a larger-than-expected quarterly loss last week, rose 4 percent despite an analyst report saying the company will be challenged for years to come.

Treasury prices fell, raising the yield on the 10-year note to 4.21 percent from 4.16 percent late Friday. Treasury prices and yields move in opposite directions.

U.S. light crude oil for January delivery fell 16 cents to $93.15 on the New York Mercantile Exchange.

In currency trading, the dollar fell versus the euro and gained against the yen.

COMEX gold for February delivery rose $1.70 to $817.10 an ounce.