Stocks rally, breaking losing streak

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NEW YORK (CNNMoney.com) -- Stocks ended a choppy session higher Thursday, breaking a three-session losing streak, as investors scooped up recently battered shares despite Cisco's lower sales outlook and some weak January retail sales.

The Dow Jones industrial average (INDU) rose 0.4%, according to early tallies, while the broader Standard & Poor's 500 (SPX) index gained 0.8%.

The Nasdaq composite (COMP) rose 0.6%, a day after falling into bear market territory, defined as a drop of 20% from the recent highs.

Stocks had declined in the morning amid ongoing worries about business and consumer spending, and Fed policy. But the tone improved in the afternoon, with investors picking up select stocks following three-straight down sessions.

Stocks seemed to put a floor in place in late January, after a brutal month, but its too soon to say whether it will stick, said John Wilson, chief technical strategist at Morgan Keegan.

"I'm encouraged, but it's going to take time before we know if we've put in a bottom or if the rally is just a fakeout," Wilson said.

The question going forward is "whether we are going to be able to continue to rise in the face of continued bad news," Wilson said.

Cisco (CSCO, Fortune 500) reported higher quarterly sales and earnings that met estimates, in a report late Wednesday. But the tech leader also forecast weaker current-quarter sales growth than what analysts are expecting, raising worries about the outlook for technology spending.

Mostly weaker January retail sales from Wal-Mart Stores and other companies added to concerns about a consumer spending recession.

And Dallas Fed Bank President Richard Fisher became the third central bank official this week to hint that rising inflation could limit the central bank's ability to keep aggressively cutting interest rates.

Eye on the Fed. Stocks have had an abysmal start to the year amid worries that the credit crisis and housing market meltdown has sent the economy into a recession. Recent commentary from the Federal Reserve has added to worries this week.

Wednesday's selloff was sparked by comments from Charles Plosser, the president of the Federal Reserve Bank of Philadelphia and a voting member of the Fed's policy-setting committee. Plosser said that recession risks have grown, echoing comments made by another Fed official on Tuesday. Plosser also talked about inflation risks, which the market took as a sign that the Fed may not be willing to continue lowering rates as aggressively in the future.

On Thursday afternoon, Dallas Federal Reserve Bank President Fisher, speaking to bankers in Mexico City, said he had voted against the half-percentage point rate cut at the last Fed policy meeting because he remains concerned about inflation. (Full story).

The central bank cut short-term interest rates twice at the end of last month as a means of shoring up the struggling economy and loosening up the still-stagnant credit markets. However, investors are hoping that the Fed will continue to cut interest rates going forward, particularly amid recent economic reports that have shown the slowdown continues.

More woes for housing. The December pending home sales index fell 1.5%, missing forecasts for a decline of 1%. Pending home sales fell 3% in the previous month.

Another report released Thursday, from the National Association of Realtors, said that home prices are on track to fall this year. Only a month ago, the group forecast that prices would stabilize in 2008. (Full story).

In other economic news, the number of Americans filing new claims for unemployment last week fell, but less than what economists were expecting, the government reported.

Consumers in retreat. Adding to fears about the economy: further evidence that consumer spending is on the decline, following weaker Jan. sales from a number of the nation's retailers.

Leading the pack, Wal-Mart Stores (WMT, Fortune 500) reported a smaller-than-expected rise in January same-store sales, or sales at stores open a year or more. Rival Target (TGT, Fortune 500) reported a steeper-than-expected drop in sales. Nonetheless, both Wal-Mart and Target stock rose.

J.C. Penney reported a smaller-than-expected decline in January sales, sending its stock higher.

In other corporate news, Delta Air Lines (DAL, Fortune 500) and Northwest Airlines (NWA, Fortune 500) are moving closer toward a merger that would create the nation's largest air carrier, according to reports.

Market breadth was positive. On the New York Stock Exchange, winners topped losers by 3 to 2 on volume of 1.74 billion shares. On the Nasdaq, advancers edged decliners by 4 to 3 on volume of 3 billion shares.

Other markets. Treasury prices slumped, raising the yield on the benchmark 10-year note to 3.77% from 3.6% late Monday. Bond prices and yields move in opposite directions.

In currency trading, the dollar gained versus the yen and the euro after the Bank of England cut interest rates. The European Central Bank kept rates steady but hinted it may need to cut them later in the year because of the impact of the U.S. slowdown.

U.S. light crude oil for March delivery rose 97 cents to $88.11 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery added $5 to $910 an ounce.