Stocks stage big rally

NEW YORK (CNNMoney.com) -- Stocks spiked Monday afternoon after S&P reiterated its top rating for Ambac Financial and took rival MBIA off its credit watch list, soothing worries about problems for the bond insurers spreading to the broader market.

The Dow Jones industrial average (INDU) added 1.5% according to early tallies. The broader Standard & Poor's 500 (SPX) index gained 1.4%. The Nasdaq composite (COMP) advanced 1%.

Stocks struggled higher through most of the session on bets that troubled bond insurer Ambac could reach an agreement today with a group of banks on a plan to raise capital to shore up its business. Also helping sentiment was an existing home sales report that showed a smaller-than-expected decline.

But stocks lost steam in the mid-afternoon, until S&P came out with new ratings on the bond insurers in the late afternoon. S&P reiterated its top-tier rating on Ambac, although it kept the company on its credit watch list. S&P also removed rival MBIA from its credit watch list.

Shares of both Ambac and MBIA spiked on the news, giving a boost to a variety of financial stocks, and by turn, the overall market.

Bond insurers have been in focus lately amid worries that if they can't raise enough capital to maintain their ratings, they'll be downgraded, which would make it harder for them to generate new business. It could also spark another wave of writedowns for the big banks.

Economic news. The National Association of Realtors said existing home sales fell to a 4.89 million unit annual pace in January, down from a revised 4.91 million unit annual pace in December.

Sales fell to the lowest level in nearly a decade, but the reading came in better than expected, helping lift sentiment. Economists had forecast sales to decline to a 4.8 million unit annual pace.

Corporate news. On the earnings front, home improvement retailer Lowe's (LOW, Fortune 500) shares rose 3%, despite reporting weak quarterly results. Lowe's posted a lower fourth-quarter profit and said it expects 2008 results that are short of expectations. However, Lowe's also said that in the current quarter, it expects a narrower drop in sales at stores open a year or more, also known as same-store sales.

Genentech (DNA) shares soared 8.4%. The Food and Drug Administration approved on Friday the drugmaker's Avastin for the treatment of breast cancer. (Full story).

But Citigroup (C, Fortune 500) slipped over 2% after Goldman Sachs cut its earnings outlook for the financial company, predicting it would need to take more writedowns related to bad mortgage bets. Goldman also cut its forecasts on a number of other big banks, the AP reported. Oppenheimer also cut its forecasts on Citigroup.

Shares of Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) fell after Goldman Sachs downgraded the companies to "sell" from "neutral," saying it expects the companies to announce big writedowns. Last week, Merrill Lynch downgraded the stocks too.

Goldman also downgraded Washington Mutual (WM, Fortune 500) to "sell" from "neutral," according to reports.

Investors cheer merger news. Getty Images, which sells photography and video images, agreed to be bought for $2.1 billion by private-equity firm Hellman & Friedman LLC. Getty (GYI) shares jumped 30%.

Electronic Arts (ERTS) made an unsolicited $2 billion offer for gaming competitor Take-Two Interactive (TTWO), saying it was seeking to go to shareholders after Take-Two's board turned down two previous offers over the last two weeks. Electronic Arts shares fell 6%, while Take-Two shares skyrocketed 55%.

Alcoa (AA, Fortune 500) was another gainer, rallying almost 6% after European regulators approved its $2.7 billion deal to sell its packaging unit to New Zealand company, the Rank Group.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by two to one on volume of 1.13 billion shares. On the Nasdaq, advancers beat decliners three to two on volume of 1.73 billion shares.

Other markets. U.S. light crude oil for April delivery rose 29 cents to $99.10 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $7.30 to $940.50 an ounce.

Treasury prices slipped, raising the yield on the benchmark 10-year note to 3.87% from 3.8% late Thursday. Bond prices and yields move in opposite directions.

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