Retail news, buyout bid fuel rally

Blue-chip issues led the way in Thursday’s powerful stock rally, but the rest of the market wasn’t far behind.

Shares zoomed as June sales reports from key retailers came in better than expected and as another big merger deal boosted confidence that the buyout wave would continue.

Buying by bearish traders who were closing out bets that the market would sink also stoked the advance.

The Dow Jones industrial average surged 283.86 points, or 2.1%, to a record 13,861.73.

The broader Standard & Poor’s 500 jumped 28.94 points, or 1.9%, to a record 1,547.70.

Also setting a new high was the Russell 2,000 small-stock index. But gauges of smaller stocks in general lagged somewhat behind the gains in big stocks.

The Russell rose 15.21 points, or 1.8%, to 855.18.

The Nasdaq composite gained 49.94 points, or 1.9%, to 2,701.73, its highest since 2001.

Investors poured into the market after retailers including Wal-Mart Stores, J.C. Penney and Target reported June sales that were above expectations. That relieved some of the worries that the housing market’s downturn would trigger a sharp pullback in spending by consumers.

The retail data “really contradicted the concerns that the market had several days ago” about consumers, said Michael Malone, trading analyst at Cowen & Co.

Another catalyst for the rally: Mining giant Rio Tinto agreed to buy aluminum maker Alcan for $38 billion, or $101 a share, far above the hostile offer of $76 a share that Alcoa had on the table for Alcan.

The deal helped damp recent concerns that the takeover boom would wane as lenders raise the cost of buyout loans.

The ferocity of the rally took many investors by surprise, coming just two days after the Dow sank 148 points on jitters about the housing market’s woes.

“This is what we old-timers call a melt-up,” said Peter Kenny, managing director at Knight Equity Markets in Jersey City, N.J. “It’s been a crazy day, a fun day, the kind of day we don’t see nearly as much as we’d like.”

As share prices surged, “short sellers” were squeezed, traders said.

In a short sale, a bearish trader borrows stock and sells it, betting the price will drop. If it does, the trader profits by repurchasing stock at a lower price to repay the loaned shares.

But if the stock rises instead, the short seller faces potentially unlimited losses until he closes out the bet.

The dramatic rally Thursday forced short sellers to jump into the market to buy stock, adding more fuel to the advance.

Although major market indexes rocketed, the rally’s breadth set no records: Winners topped losers by about 3 to 1 on the New York Stock Exchange.

Investors’ preference for bigger stocks also hinted at an underlying sentiment of caution about the market’s next move, some analysts said.

Among the day’s highlights:

* In the retail sector, Wal-Mart rose $1.15 to $48.83, Penney jumped $4.30 to $75.46 and Target shot up $4.44 to $70.04.

Target also got a boost on speculation that activist investor William Ackman has taken a stake in the second-largest U.S. discount retailer. Ackman declined to comment.

On the downside, Macy’s slid $1.16 to $39.25 after its June sales disappointed investors.

* Alcan soared $8.85 to $98.45 on news of Rio Tinto’s bid. Rio Tinto fell $6.71 to $317.71. Alcoa rose $2.86 to $45.29 on speculation that it might attract a bid from a mining company as well.

Commodity stocks were strong across the board. They have been among the market’s leaders in recent years, as demand for commodities has risen with the global economy’s strength. Deltic Timber rose $2.13 to $56.65, steel maker Mechel jumped $3.66 to $47.70 and Southern Copper gained $3.66 to $109.02.

* Industrial issues continued their recent advance on hopes that U.S. export demand would remain robust. Eaton jumped $3.13 to $98.39, Textron gained $2.50 to $114.20 and Whirlpool was up $2.14 to $111.09.

Black & Decker soared $6.55 to $96.33 on rumors it might be a takeover target.

* In the tech sector, Intel rose $1.43 to $26. Banc of America Securities boosted its stock-price forecast and earnings estimates for the world’s biggest maker of semiconductors on “solid” demand for its processors.

* Financial stocks rebounded from a recent drubbing on worries about losses in the sub-prime mortgage market. Bear Stearns gained $4.09 to $142.12 and Countrywide Financial added 51 cents to $36.68.

But Rancho Cucamonga-based PFF Bancorp dived $4.78 to $20.97 after the firm said it would record a loan loss provision of at least $20 million in the second quarter because of weakness in its real-estate portfolio.

* Stocks were mostly higher abroad, helped by Wall Street’s gains. The Mexican market surged 1.1%. The German market was up 2%.

* Treasury bond yields edged up as some investors sold bonds to buy stocks. The 10-year T-note ended at 5.13%, up from 5.09% on Wednesday.

* The dollar continued to sink. The euro hit a record high of $1.378, up from $1.376 on Wednesday.

* Oil prices took a break. Near-term crude futures slipped 6 cents to $72.50 a barrel.