Stocks rallied on a broad front yesterday, taking back most of Tuesday’s losses. The rally was led by the financial and health care stocks, which rose 1.2% and 1.3%, respectively.

The rally in the bank stocks occurred even as their CEOs were being grilled on Capitol Hill by a Congress intent on laying blame for the financial mess. JPMorgan Chase, (JPM) rose 1%, Goldman Sachs (GS) was up 0.7%, and Morgan Stanley (MS) rose 0.4%, even after their executives admitted to errors of judgment during the crisis.

The market did have a shaky start as investors reacted to the possibility that Google (GOOG) would act on threats to pull its operation out of China. The big Internet company is challenging China’s online security breaches that target human rights protestors. 

Telecom stocks again failed to find footing and fell 0.4%. It was the sole S&P group to lose yesterday, even though the sector has an average dividend yield of more than 5%.

Energy stocks started the day in the red but recovered, ending the day with a 0.4% gain despite a lower close for crude oil.

The Fed’s Beige Book said that economic activity is improving, but it cautioned that credit quality is still worsening.

At the close, the Dow Jones Industrial Average (DJI) had gained 54 points to 10,681, the S&P 500 (SPX) rose 9 points to 1,146, and the Nasdaq (NASD) was up 26 points to 2,308. 

The NYSE traded 970 million shares with advancers over decliners by 3-to-1. On the Nasdaq, advancers were ahead by about 2-to-1 on volume of 643 million shares.

February crude oil fell $1.14 to $76.65 a barrel, and the Energy Select Sector SPDR (XLE) gained 22 cents, closing at $59.57.

After a steep midday sell-off, February gold rallied to close at $1,136.80, up $7.40 an ounce. The PHLX Gold/Silver Sector Index (XAU) closed at $177.92, up $2.

What the Markets Are Saying

Yesterday’s broad buying not only erased most of Tuesday’s losses, but even drove the Dow Industrials to a new 12-month intraday and closing high. The power of yesterday’s advance was remarkable since, despite a negative reaction to the Google news, each index bounced from its 20-day moving average, and buyers disregarded warnings of overbought internal indicators from major research firms.

Standard and Poor’s, in a midday conference call yesterday, said that prices may appear to be expensive based on last year’s earnings, which would give the “500” a price-to-earnings ratio of almost 30-to-1 at current levels.

But S&P’s analysts are looking for almost a triple in average earnings and, thus, on this year’s expectations the “500” is selling at a mere 15.25 p/e. Based on that estimate they target the S&P 500 at between 1,215 and 1,250 by year-end, which puts my estimate of 1,245, based on technical analysis, nicely within that range.

Many have noted that the telecommunications sector has been lagging, and there is a reason for that. S&P notes that telecommunications is the only sector that they expect to report a loss in Q1. And that loss should be in the range of 3%.

So, despite the expected and unexpected interruptions, it appears that from the view of the fundamentalists, the bull will remain on the field. However, instead of charging at close to full speed like last year, he may be pausing at times to renew his vigor.

Today’s Trading Landscape

Earnings to be reported today include: Briggs & Stratton, Charles Schwab, CRA International, Origin Agritech, Quidel, Intel and Shuffle Master.

Economic reports due: retail sales (the consensus expects 0.4%, ex-autos it expects 0.2%), jobless claims (the consensus expects 437,000), import and export prices, RBC CASH Index, business inventories (the consensus expects 0.2%), EIA natural gas report, Fed balance sheet and money supply.  

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