US stocks rallied on Monday, led by financial companies, after Merrill Lynch took steps to shore up its balance sheet with plans to raise up to $6.2 billion and sell a lending unit. The Dow industrials and the S&P 500 closed higher for the third day in a row, while the Nasdaq posted its fifth straight day of gains.
But trading volume was light, with the stock market closing early for Christmas Eve. Merrill Lynch & Co Inc, hit by huge subprime mortgage losses, said it would increase its capital with an investment from Singapore's Temasek Holdings and Davis Selected Advisers, a US-based asset manager.
While the news lifted the financial sector as investors welcomed another big investment in a US bank, shares of Merrill fell on word Temasek was paying just $48 per share while the broker's stock trades at $53.90. Merrill's stock reversed earlier sharp gains to slide 3 percent on the New York Stock Exchange.
The S&P financial index rose 1.8 percent. Before the opening bell, Merrill also announced that it plans to sell most of its middle-market lending business to General Electric Co's commercial finance arm in a deal to free up capital. GE shares rose 1.1 percent to $37.53.
"The fact that large banks are taking the necessary steps to raise capital and clean up their balance sheets is a good indication that people understand the severity of the problem and are working to fix it," said Edward Bretschger, director of equity sales and trading, at Calyon Securities in New York.
But, "while the news is giving a boost to others, the structure and details of the (Merrill) deal are starting to come to light and the stock is under pressure."
The Dow Jones industrial average shot up 98.68 points, or 0.73 percent, to end at 13,549.33. The Standard & Poor's 500 Index gained 11.99 points, or 0.81 percent, to 1,496.45. The Nasdaq Composite Index climbed 21.51 points, or 0.80 percent, to 2,713.50.
Investors kept a close eye on the retail sector, as they speculated about how retailers fared during the holiday shopping season. A survey by consumer marketing firm America's Research Group showed on Sunday that US retailers offering the widest discounts were the winners of this holiday season in a challenging sales environment.
Shares of Wal-Mart Stores Inc, the world's largest retailer and a Dow component, gained 1.1 percent to $48.74, while shares of rival discount retailer Target Corp rose 3.5 percent to $52.47.
Trading was thin on the NYSE, with about 536.5 million shares changing hands, far below last year's estimated daily average of 1.84 billion, while on the Nasdaq, about 762.9 million shares traded, less than half of last year's daily average of 2.02 billion. Advancing stocks outnumbered decliners by a ratio of more than 3 to 1 on the NYSE and by 9 to 5 on Nasdaq.