Stocks rise on Countrywide

NEW YORK (CNNMoney.com) -- Stocks rallied Thursday, ending a volatile session higher, as investors hailed reports that Countrywide Financial is in merger talks - and took a mixed response to Federal Reserve chair Ben Bernanke's pledge to cut rates again.

The Dow Jones industrial average (INDU) added 117 points, according to early tallies. The broader S&P 500 (INX) index added 0.8 percent and the Nasdaq (COMPX) composite gained nearly 0.6 percent.

Stocks slumped in the morning after Capital One Financial's profit warning caused worries about the credit crisis spreading, but then rallied in the afternoon on Bernanke's comments on the economy and Fed policy.

However, those gains were short lived, with selling pressure resuming until the Countrywide Financial news came out and turned things around again.

Here's what was moving stocks near the close.

Stocks had slumped through the early afternoon after Capital One Financial's profit warning raised worries that the credit market mess is spiraling, furthering the risks of an economic recession.

A spate of weak December retail sales added to the morning weakness, while falling oil prices and a better-than-expected weekly jobless claims report brought some relief.

But stocks turned around in the early afternoon after Bernanke's prepared remarks were released ahead of a speech scheduled for 1 p.m. ET this afternoon. When the speech ended, stocks abandoned gains, turning lower again, before Countrywide gave investors another reason to jump back in.

Stocks are also benefiting from technical factors. After having "corrected," or fallen about 10 percent off the recent highs, stocks are now in a good position to bounce back a bit as investors scoop up recently battered shares.

Late-session reports that Countrywide Financial (CFC, Fortune 500) is up for sale gave the market its second wind, as Wall Streeters bet that Bank of America's investment in the company could be a good sign. Countrywide is seen as the poster child for the subprime mortgage market mess and if a big firm like Bank of America is interested in it, that could suggest that the financial market fallout is getting closer to turning a corner.

Capital One Financial (COF, Fortune 500) warned that 2007 profit will miss previous estimates because of more loan delinquencies and its need to add to its fourth-quarter cash reserve. Shares of the credit card issuer lost more than 5 percent in the morning.

The profit warning exacerbated fears that the problems in the credit market are expanding beyond the subprime mortgage market.

"The Capital One announcement was another confirmation that we are not just seeing defaults on home loans, but on credit card and other kinds of consumer debt," said Bryant Evans, portfolio manager at Cozad Asset Management.

Wall Street also mulled a rash of mostly disappointing December sales results from the nation's retailers, confirming that consumer spending has slowed down, with the 2007 holiday season among the weakest in years. (Full story).

Overall December same-store sales rose just 0.9 percent in the month after rising 3.3 percent a year ago. Same-store sales is a retail measure referring to sales at stores open a year or more. Among the individual companies, Gap (GPS, Fortune 500) reported same-store sales fell 6 percent, while AnnTaylor Stores (ANN) said sales fell 9.4 percent.

On the upside, Wal-Mart Stores (WMT, Fortune 500) reported sales that were at the high end of its guidance, although the largest retailer also warned that fourth-quarter earnings won't meet forecasts. Shares rose nonetheless.

Dow component Alcoa (AA, Fortune 500) reported higher quarterly earnings that topped estimates late Wednesday, starting off the fourth-quarter reporting period on a plus note. Shares rose modestly. (Full story).

Market breadth was positive. On the New York Stock Exchange, winners beat losers beat winners 2 to 1 on volume of 1.44 billion shares. On the Nasdaq, advancers beat decliners three to two on volume of 2 billion shares.

Stocks rallied Wednesday in a late-session turnaround as investors scooped up shares that had been beaten down in the previous five sessions. Wall Street has had a rough start to 2008 amid ongoing worries that the credit and housing market collapse will send the economy into recession. Some on Wall Street are arguing that it is already in recession. (Full story).

Recession talk has added to calls for the Federal Reserve to cut interest rates at the next policy meeting by a half-percentage point or possibly step in and cut interest rates ahead of the meeting.

The central bank has cut the fed funds rate, a key short-term interest rate, at each of its last three policy meetings.

Treasury prices were little changed, with the yield on the 10-year note at 3.82 percent, little changed from where it stood late Wednesday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for February delivery fell $1.77 to $93.90 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $4.20 to $877.50 an ounce.