Stocks rise on Countrywide

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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 0.9 percent. The broader S&P 500 (INX) index added 0.8 percent and the Nasdaq (COMPX) composite gained nearly 0.6 percent. The Russell 2000 (RUT.X) small-cap index added more than 1 percent.

American Express (AXP, Fortune 500) was likely to be active Friday. After the close Thursday, the company said that it expects lower profit through 2008 because of slower spending and missed credit card payments. Shares slumped 7 percent in extended-hours trading.

Stocks seesawed on both sides of unchanged throughout the session, before spiking in the last hour on reports that Countrywide Financial (CFC, Fortune 500) is in takeover talks with Bank of America (BAC, Fortune 500).

Countrywide is seen as the poster child for the subprime mortgage market mess and investors seemed to take Bank of America's interest in the company as a sign that the financial market fallout is getting closer to turning a corner.

In other merger news, Delta Air Lines (DAL, Fortune 500) surged on merger talk as well.

Earlier in the session, stocks had fallen after Capital One Financial's profit warning caused worries about the credit crisis spreading and a spate of weak retail sales raised the alarm about consumer spending.

Afternoon comments from Ben Bernanke also helped investor sentiment, although stocks were volatile after his speech. The Fed chief, speaking in Washington, D.C., acknowledged that the economic outlook in 2008 has weakened, but said again that the central bank doesn't think the economy will fall into a recession this year.

Stocks initially rallied in a knee-jerk reaction to Bernanke's comments before flattening out ahead of the Countrywide news.

The mixed reaction may have reflected the fact that although Bernanke's words were reassuring, they weren't that specific in terms of what the central bank will do at the late January policy meeting, said Douglas Roberts, chief investment strategist at ChannelCapitalResearch.com.

Investors have been trying to figure out if the Fed will cut the fed funds rate, a key short-term lending rate, by a quarter-percentage point or a half-percentage point when it meets on Jan. 29 and 30. The central bank has cut the fed funds rate at each of its last three policy meetings. It currently stands at 4.25 percent.

Some Wall Streeters have also called for the Fed to cut rates ahead of the scheduled meeting, amid rising bets that the economy is either in a recession or in danger of falling into one.

"I think what Bernanke wanted to do was to stabilize the markets enough so that the Fed doesn't have to take action ahead of the meeting," Roberts said. "At the same time, he didn't want the market to rally so much that it discounts a 50 basis point cut at the next meeting."

There are 100 basis points in one percentage point.

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.

Stock gains were broad based, with 24 out of 30 Dow components rising, led by financial stocks AIG (AIG, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

The rally in financials even helped Capital One Financial (COF, Fortune 500) cut its losses. Earlier, the stock had slumped after the company warned that 2007 profit will miss previous estimates because of more loan delinquencies and its need to add to its fourth-quarter cash reserve.

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 2 to 1 on volume of 2.06 billion shares. On the Nasdaq, advancers beat decliners 3 to 2 on volume of 2.64 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).

A better-than-expected weekly jobless claims report brought some relief in the morning, following last week's weak monthly jobs report.

Treasury prices slumped, as investors pulled money out of government debt and put it into stocks. The selloff lifted the yield on the 10-year note to 3.88 percent, from 3.82 percent late Wednesday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for February delivery fell $1.96 to settle at $93.71 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery rose $11.90 to settle at $893.60 an ounce.