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Stocks Close Firmly Positive On Europe Rally, M&A Optimism - U.S. Commentary


Despite indications that the markets are at overbought levels, stocks moved notably higher over the course of the trading day on Tuesday. A rally in Europe and optimism about further merger-and-acquisition activity helped generate continued buying interest.

The major averages all ended the day firmly in positive territory, reaching new multi-year closing highs. The Dow rose 53.91 points or 0.4 percent to 14,035.67, the Nasdaq advanced 21.56 points or 0.7 percent to 3,213.59 and the S&P 500 climbed 11.15 points or 0.7 percent to 1,530.94.

The strength on Wall Street was partly due to a rally by European stocks, which moved sharply higher on the heels of an upbeat report on economic sentiment in Germany.

The Zew Institute's economic sentiment index for Germany rose 16.7 points to 48.2 in February, marking the third straight month of growth. Economists had expected a reading of 35.

Positive sentiment was also generated by reports of additional activity on the merger-and-acquisition front, with Office Depot (ODP) and OfficeMax (OMX) both moving sharply higher on reports that the office supplies retailers are engaged in advanced merger talks.

Citing people familiar with the matter, the Wall Street Journal said the deal between Office Depot and OfficeMax is expected to be stock-for-stock, although the paper said precise terms couldn't be learned.

Meanwhile, traders largely shrugged off a report from the National Association of Home Builders showing that homebuilder confidence has unexpectedly deteriorated in the month of February.

The report said the NAHB/Wells Fargo Housing Market Index edged down to a reading of 46 in February from 47 in January. The modest drop by the Housing Market Index came as a surprise to economists, who had expected the index to inch up to 48.

NAHB Chief Economist David Crowe, said, "Having risen strongly in 2012, the HMI hit a slight pause in the beginning of this year as builders adjusted their expectations to reflect the pace at which consumers are moving forward on new-home purchases."

Nonetheless, trading activity was relatively subdued amid continued uncertainty about the near-term outlook for the markets.

While the markets are generally seen as overbought, traders seem reluctant to sell stocks and miss out on any further upside.

Sector News

Energy stocks showed a strong move to the upside on the day, with the NYSE Arca Oil Index and the NYSE Arca Natural Gas Index advancing by 1.5 percent and 1.6 percent, respectively.

The strength among energy stocks coincided with an increase in related commodities prices, as crude for March delivery rose $0.80 to $96.66 a barrel and natural gas for March delivery climbed $0.119 to $3.272 per million BTUs.

Considerable strength also emerged among transportation stocks, as reflected by the 1.3 percent gain posted by the Dow Jones Transportation Average. With the gain, the average reached a new record closing high.

Semiconductor and pharmaceutical stocks also posted strong gains, while health insurance stocks came under pressure after the government's preliminary Medicare Advantage payment rates showed steeper than expected cuts. Gold stocks also bucked the uptrend as the price of the precious metal fell.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Tuesday. While Japan's Nikkei 225 Index fell by 0.3 percent, Australia's All Ordinaries Index rose by 0.4 percent.

Meanwhile, the major European markets showed notable moves to the upside. The U.K.'s FTSE 100 Index advanced by 1 percent, while the German DAX Index and the French CAC 40 Index jumped by 1.6 percent and 1.9 percent, respectively.

In the bond market, treasuries came under pressure in afternoon trading to end the day moderately lower. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, rose by 1.9 basis points to a ten-month closing high of 2.026 percent.

Looking Ahead

While earnings season is winding down, trading on Wednesday could be impacted by reaction to Dell's (DELL) fourth quarter results, with the computer giant releasing its results after the close of today's trading.

Traders are also likely to keep an eye on reports on housing starts and producer price inflation as well as the release of the minutes of the Federal Reserve's latest monetary policy meeting.

by RTTNews Staff Writer

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