MarketView for May 4

Summary

Stock prices turned in a strong performance on Monday, with the result that the S&P 500 index is now in positive territory for the year. The driving force of the day were the beliefs that  any bank capital shortfalls are most likely manageable and the latest housing data report is possibly pointing to the fact that the recession is easing.

Bank stocks were among the day’s best performers with Citigroup up 7.7 percent at $3.20 and Bank of America up 19.3 percent at $10.38. Wells Fargo rose 23.7 percent to $24.25, while JPMorgan closed up 10.2 percent at $35.79.

Any news that points to more stabilization in the banking sector will be a positive for stock investors since authorities have said shoring up the financial system is essential in reviving the recession-hit economy.

Although the final stress test results have yet to be released, they are expected  on Thursday, the thought now it that they will show banks do not need a larger financial cushion. That outcome would minimize the dilution of current shareholders' equity and avoid giving the government a bigger stake in the banks. At the same time, White House comments that the Obama administration did not see a need right now to ask Congress for more bank bailouts was seen a positive turn for the better.

Meanwhile, the S&P 500 is up 34 percent from its 12-year closing low on March 9. However, it is still off 42 percent from its October 2007 record high.

All but one of the Dow's 30 stocks ended in positive territory. The KBW Bank index is up 88 percent since early March concerns over the idea that the government was planning to nationalize several of the largest banks ran rampant.

On the economic front, fresh data fueled investors' hopes that the recession may be easing as pending sales of existing homes rose unexpectedly in March, sending shares of home builders higher. Lennar rose 9.3 percent to $10.34, while Toll Brothers closed up 6.5 percent to $20.73. D.R. Horton ended the day up 9.1 percent at $13.49.

The first-quarter earnings reporting season is winding down, but Sprint Nextel gave the Street some good news when it posted an operating profit. Sprint shares ended the day up 7.1 percent to $5.

The rising optimism over the economy underpinned gains in the shares of the large diversified manufacturers, such as United Technologies, up 3.4 percent at $51.22. Boeing closed out the day up 2.3 percent at $42.15 after the big company reaffirmed maiden flight plans for its 787 Dreamliner.

Apple gave the Nasdaq its biggest boost, rising 3.8 percent to $132.07.

Home and Construction Data Encouraging

Pending sales of previously owned homes rose for a second straight month in March, while construction spending edged higher, indicating a possible moderation in the long housing slump. At the same time, a Federal Reserve survey of loan officers showed demand for prime mortgages rose in the first quarter for the first time since early 2007.

The National Association of Realtors said its pending home sales index, based on contracts signed in March, rose 3.2 percent as first-time buyers waded into the market to take advantage of favorable prices and mortgage rates., while a  report from the Commerce Department showed construction spending rose 0.3 percent in March, the first increase in six months.

NAR Chief Economist Lawrence Yun attributed the rise in signed contracts for home purchases to first-time buyers taking advantage of the combination of low prices and mortgage rates, as well as an $8,000 tax credit, making homes more affordable.

"We need several months of sustained growth to demonstrate a recovery in housing, which is necessary for the overall economy to turn around," said Yun.

The NAR's Housing Affordability Index edged down to in March from a record in February due to higher home prices. The index was 30.8 percentage points higher than a year ago.

The index is a broad measure of housing affordability linking the relationship between home prices, mortgage interest rates and family income. The Senior Loan Officers Survey from the Fed found a surge in demand for prime mortgages even as banks tightened home loan standards.

However, the Commerce Department report also said that while construction spending rose, private construction slipped, mainly on a 4.2 percent decrease in residential building. Public construction increased 1.1 percent after gaining 1.3 percent in February. Most of the boost came from state and local governments.