Stocks Surge, Lifting Hopes for Strong ’05

The stock market’s year-end rally resumed Thursday, lifting the technology-dominated Nasdaq composite index to a four-year high and key indexes of transportation and mid-sized stocks to record highs.

The sudden buying wave, after three days of mostly falling share prices, revived hopes that Wall Street might yet turn what has been a lackluster year into a winner.

The Nasdaq index jumped 32.53 points, or 1.5%, to 2,220.46, its best closing level since June 2001. Internet-related shares led the tech sector higher, with search giant Google rising $5.30 to $403.45, breaching the $400 mark for the first time.

The broader market also advanced. The Dow Jones industrial average ended at an eight-month high of 10,720.22, up 45.46 points, or 0.4%. The blue-chip Standard & Poor’s 500 climbed 11.59 points, or 0.9%, to 1,242.80, less than three points shy of its four-year high set Aug. 3.

Many analysts have been predicting that stocks would climb by the end of the year, with the economy seemingly on solid ground, corporate profits still rising and oil prices sliding. But a rally that began in mid-October had stalled out in recent days.

Energy prices provided a spark for Thursday’s market gains. Near-term crude oil futures in New York sank $1.54 to $56.34 a barrel, the lowest since June 15, after government data showed that U.S. natural gas inventories rose 1.6% last week.

Growing inventories may keep natural gas prices from rising further this winter, which in turn could help keep a lid on oil prices as well, some experts say.

Falling long-term interest rates also may be encouraging stock investors. The rate, or yield, on the 10-year U.S. Treasury note -- a benchmark for mortgage rates -- slipped to 4.46% Thursday from 4.47% Wednesday. It had reached a two-year high of 4.66% on Nov. 4, on concerns that the Federal Reserve might continue to lift short-term rates well into 2006 to damp inflation pressures.

But inflation reports this week have been subdued, boosting hopes that the central bank might make only a few more credit-tightening moves.

The market’s rally “is coinciding with the hope that the Fed might be close to being done,” said Joseph Keating, who oversees $3 billion in assets as chief investment officer at First American Asset Management in Birmingham, Ala.

If interest rates are nearing a peak, and if energy prices stay down, investors might become more optimistic about economic growth in 2006. That could explain why stock sectors that are particularly sensitive to the economy’s swings have led the market since mid-October.

Transportation stocks, for example, have been roaring. Dow Jones’ index of 20 major airline, trucking and railroad shares jumped to a record high Thursday, rising 80.74 points, or 2%, to 4,082.39. It has surged 14% since Oct. 13.

Technology stocks -- particularly big-name issues -- also have been hot. The Nasdaq 100 index of that market’s largest firms has outpaced the broader Nasdaq market since Oct. 13, gaining 9.3%, compared with 8.5% for the Nasdaq composite index.

Among Nasdaq’s biggest names, biotechnology giant Amgen rose $1.83 to $83.08 on Thursday. Internet search engine Yahoo surged $2.19 to a five-year high of $42.23.

Hewlett-Packard provided more good news for tech investors late Thursday by reporting better-than-expected sales and earnings in its latest quarter. HP shares jumped to $30.74 in after-hours trading, after closing up 73 cents to $29 in regular trading.

Mark Donahoe, head trader at brokerage Piper Jaffray in Minneapolis, said the recent strength in tech shares also could reflect moves by “short sellers” to close out their bets as the market went against them.

Short sellers borrow shares and sell them, betting that prices will fall and that they’ll be able to repay the loaned stock later with cheaper shares. But when the market rallies, short sellers often jump in to buy stock and halt their losses. That can help drive prices higher.

“This could be a lot of short-covering,” Donahoe said of the tech rally. The number of shorted Nasdaq shares hit an all-time high in mid-October.

Another sector that has been leading the latest rally: mid-sized stocks. Standard & Poor’s index of 400 mid-sized issues rose 10.18 points, or 1.4%, to a record 727.06 on Thursday.

Investors may be buying mid-sized companies as a compromise, analysts say. Many Wall Street pros have been advising clients to shift from small stocks, which have led the market since 2000, to blue-chip names.

Some investors, reluctant to step up to still-struggling blue chips, probably are “splitting the difference” by buying mid-sized stocks, said Joseph Lisanti, editor of S&P;’s Outlook investment newsletter in New York.

The S&P; mid-sized index is up 9.6% this year. By contrast, the S&P; 500 is up 2.6%.

Among the day’s highlights:

* Winners topped losers by nearly 3 to 1 on the New York Stock Exchange and by more than 2 to 1 on Nasdaq, although trading volume was moderate.

* In the transportation sector, AMR, parent of American Airlines, soared $1.04 to $17.69. Rail giant Burlington Northern gained $1.97 to $65.97.

* Beaten-down home builders rose despite the government’s report of a drop in housing starts in October. Ryland Group jumped $3.66 to $72.21; Centex was up $3.52 to $73.03.

* Gold hit an 18-year high, as near-term futures in New York rose $7.90 to $486.20 an ounce. Traders said investors were adding gold to their portfolios in year-end diversification moves.

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New bull run?

Wall Street’s strong rally since mid-October has been led by shares of transportation, technology and mid-sized companies.

*--* % change since: Index Oct. 13 Dec. 31 Dow transports +13.7% +7.5% Nasdaq 100 +9.3% +3.4% Nasdaq compos. +8.5% +2.1% S&P; mid-cap +8.2% +9.6% REITs * +7.5% +5.3% S&P; small-cap +6.8% +6.3% S&P; 500 +5.6% +2.6% Dow industrials +4.9% --0.6% NYSE compos. +4.2% +4.8%

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*Bloomberg News index of real estate investment trust shares

Source: Bloomberg News