NEW YORK – The stock market got a big jump on beating last year’s flat performance.

Stocks rose sharply Tuesday in the first trading of 2012 as investors returning from the holiday were encouraged by positive economic reports from the United States and around the world.

The Dow Jones industrial average rose more than 260 points in morning trading before sliding back at midday. At 12:15 p.m. EST, the Dow was up 214 points, or 1.7 percent, at 12,430.

The market could be getting an extra boost this year from what is traditionally called the January effect: Investors sell stocks at the end of the year to lock in losses for tax purposes, then come back in January and buy stocks to reinvest.

The effect could be more pronounced this year because the stock market was so volatile in 2011 and more investors were forced to take losses, said Sam Stovall, chief equity strategist at Standard & Poor’s Capital IQ.

Those investors are back hunting for bargains.

“Investors are a lot like dieters and look to January as a new beginning,” Stovall said.

Bank stocks and materials and industrial companies posted the largest gains. Bank of America rose 4.9 percent and JPMorgan Chase 4.6, the biggest winners among the 30 stocks in the Dow.

The gains were broad. All but three of the 30 Dow stocks were higher. Of the 10 major categories of stocks in the S&P 500 index, one, utilities, was lower. Utilities are traditionally conservative stocks to own.

In the latest sign of strength in the U.S. economy, manufacturing expanded in December at the fastest pace in six months. Construction spending jumped in November as builders spent more on single-family homes, apartments and remodeling projects.

Germany, Europe’s largest economy, reported that the average number of people unemployed last year was the lowest in two decades. Germany has an unemployment rate of 6.6 percent, compared with 8.6 percent in the United States.

And a Chinese manufacturing index rose in December, reversing a November slide and raising hopes that China’s economic slowdown is under control.

In other market activity Tuesday, the S&P 500 was up 22 points at 1,279, and the Nasdaq rose 47 to 2,652.

January is a fairly good predictor of the year to come for U.S. stocks. In the past 83 years, the full year has taken its direction from the first month 60 times, according to S&P.

The first day is less useful, though. If you were to bet on whether the market would finish the year up or down based on how it performed the first day, you would be right only about half the time.

Tuesday was on track to be the fourth straight year of market gains on opening day. On Jan. 3, 2011, the S&P rose 14 points, but the market finished the year almost exactly where it began. The S&P 500 ended the year down a sliver — 0.04 of a point.

The economic reports overshadowed, at least for a day, concerns in the global markets about the European debt crisis, which will probably be the main catalyst for markets in the weeks ahead.

Earlier Tuesday, the government of debt-crippled Greece warned that it would have to ditch the euro currency if the details of a second international bailout worth $169 billion can’t be worked out.

Investors have been afraid that a Greek exit from the euro currency union would further disrupt the Greek economy and cause heavy losses for European banks that hold Greek government debt, perhaps triggering a global financial crisis.

The second Greek bailout was approved last October, but Greece still has to persuade its creditors, including banks and investment firms, to take steep losses on their holdings of Greek debt.

Greece also says more tax increases and spending cuts may be required. A spokesman for the Greek government, Pantelis Kapsis, said negotiations in the next three or four months with international debt monitors will “determine everything.”

In other corporate news:

• Chesapeake Energy Corp. rose 4 percent after the energy company sold a part of its Ohio oil and gas business to a unit of French energy company Total SA for $2.32 billion.

• Rambus Inc. jumped 8 percent after the technology licensing company raised its fourth-quarter revenue forecast to $83 million from an earlier range of $66 million to $71 million.

LONDON (Reuters) – European shares made a positive start to the New Year as they extended a two-week rebound in thin trade on Monday, with automotive stocks and euro zone banks leading the charge.

At 1216 GMT the FTSEurofirst 300 index of European shares was up 0.6 percent at 1006.07, breaking above the full retracement level of the December7-Dec 19 fall.

Volumes on the index registered a slight pick-up from last week's lows but remained thin at 37 percent of the 90-day average as the British and United States markets were closed.

With many fund managers still on holiday, equity markets were driven by short-term trades into sectors enjoying technical rebounds, such as automotives (.SXAP), euro zone banks (.SX7E) utilities (.SX4P) and insurers (.SXIP).

"People are looking for underperformers and rotating sectors every few days," a trader said.

"They're scared and keep their finger ready: if the market inches up, they buy, if it moves down, they don't."

Auto stocks were the top performers as they gained 1.9 percent after breaking above their 200-day moving average at the open, with tire makers Continental (CONG.DE) and Nokian Renkaat (NRE1V.HE) rising 4.7 percent and 2.4 percent, respectively.

The insurance and utilities sectors also outperformed as they broke above the 50 percent retracement of the November sell-off.

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Asset returns in 2011: http://r.reuters.com/suz52s

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EURO ZONE

Euro zone banks rose 1.2 percent after closing above the 38.2 percent Fibonacci retracement level of the November move on Friday.

Natixis argued current valuations on euro zone banks provided a "major buying opportunity," arguing the region's leaders would not allow any default by a large country and the European Central Bank is providing adequate liquidity support to lenders.

"A default by a large euro zone country and/or its withdrawal from the euro is a virtually zero probability event," Natixis said in a note.

"As this event would have catastrophic consequences (on the rest of Europe), there are grounds to think that it will not occur."

The comments came as Greece's central governor warned that exiting the euro would have disastrous consequence for his country and the Greek government reaffirmed its belief that a return to the drachma can be avoided if reforms are implemented.

Natixis also noted euro zone banks have started to reduce their exposure to troubled sovereign debt other than domestic paper, and are working to increase profitability to meet stricter capital requirements.

Around Europe, Germany's Xetra Dax (.GDAXI) and Italy's FTSE Mib outperformed, as they rose 1.9 percent and 1.5 percent respectively, helped by better-than-expected manufacturing data.

Italy's and Germany's PMIs for December were unexpectedly revised up on Friday, while the euro zone reading was kept unchanged at 46.9, pointing to a slowdown in the rate at which the area's manufacturing activity is shrinking.

(Editing by David Cowell)

NEW YORK (Reuters) – Stock index futures were little changed on Friday, the last trading day of 2011, as investors waited until the next year to begin making large bets.

With the S&P 500 on track for a slight gain for the year, many market participants will likely stay on the sidelines on what is typically one of the lowest-volume sessions for the year.

Equities may continue a trend followed for much of 2011, taking a cue from European markets. Mixed results from a recent auction for Italian bonds reignited worries about the region's debt crisis. European shares rose 0.6 percent Friday but were on track for their worst year since 2008. (.EU)

Volume this week has been about half the year's daily average, with many traders away because of the Christmas and New Year's holidays. The anemic action has amplified moves in both directions.

"The volume has the potential to add volatility today, but it looks like this is going to be a quiet day," said Robert Pavlik, chief market strategist at Banyan Partners LLC in New York. "There doesn't seem to be any indication that we'll be pushed around or that much will happen, but the volume is something investors need to be mindful of."

Verizon Wireless, a venture of Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L), said it will add a $2 fee for one-time bill payments, raising the ire of consumers.

The only economic indicator on tap is the December ISM New York index, due at 8:30 a.m. EST (1330 GMT)

China's factory activity shrank again December as demand at home and abroad slackened, a purchasing managers survey showed Friday, reinforcing the case for pro-growth policies from Beijing.

Concerns about a hard economic landing in China have been on investor minds throughout 2011 and could linger into next year. Shares in Hong Kong and China had their worst year since 2008

S&P 500 futures rose 2 points and were about even with fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures rose 7 points, and Nasdaq 100 futures rose 2.5 points.

Global markets have been battered this year by Europe's debt crisis, upheaval in the Middle East, a devastating Japanese earthquake and tsunami as well as a struggling U.S. economy. The S&P is up 0.4 percent, while the Dow has gained 6.2 percent as investors sought safety in large-cap dividend -paying names. The Nasdaq is down 1.5 percent.

"Given everything the world went through this year, ending flat is practically a victory for professional investors," Pavlik said.

Volatility was high throughout the year, with the S&P climbing 9 percent at its peak, and dropping 14.5 percent to its bottom. The CBOE Volatility index (.VIX) is up about 28 percent this year.

Financials were the weakest sector as the concerns about global growth threw into doubt the group's ability to grow profits. Bank of America Corp (BAC.N) was the Dow's worst performer, tumbling 59 percent. JPMorgan Chase & Co (JPM.N) slumped 21 percent.

Cabot Oil & Gas Corp (COG.N) was the only S&P component to double in 2011, up 103 percent, followed by another energy name, El Paso Corp (EP.N), which rose 92 percent.

McDonald's Corp (MCD.N) advanced 31 percent, the biggest gainer on the Dow.

U.S. stocks rallied 1 percent on Thursday, moving the S&P 500 back into positive territory for the year on positive signals on the U.S. economy, including strong data on home sales and Midwest factory activity.

(Reporting by Ryan Vlastelica; editing by Jeffrey Benkoe)

NEW YORK (Reuters) – Stocks rose on Thursday, resuming their upward move into year-end, as positive data on the U.S. economy offset concerns about the euro zone.

But the S&P 500 continued to churn around its 200-day moving average, although the index was back in positive territory for 2011 ahead of the last trading day of the year. Scant volume increased the market's volatility.

"The low-volume rally is likely to continue to tomorrow, sort of setting the stage of the first quarter of next year," said Uri Landesman, president of Platinum Partners in New York.

"I am bullish on the beginning of next year because the market has discounted a lot of bad news out of Europe already and technically the market is due for a early bounce."

The Dow Jones industrial average (.DJI) was up 107.17 points, or 0.88 percent, at 12,258.58. The Standard & Poor's 500 Index (.SPX) was up 9.78 points, or 0.78 percent, at 1,259.42. The Nasdaq Composite Index (.IXIC) was up 17.37 points, or 0.67 percent, at 2,607.35.

Italian bond yields, which helped break a five-day rally with a sharp selloff in the last session, eased on Thursday after a debt auction.

Stocks added to gains after the euro erased losses against the dollar, rebounding from a 15-month low in thin trading.

But the yield on 10-year Italian bonds hovered near 7 percent, a level markets see as a danger zone for Italy's government debt.

Pending sales of existing U.S. homes surged to a 1-1/2 year high in November, offering more signs of a tentative housing recovery. That report drove the Dow Jones home builders index (.DJUSHB) up 3.5 percent.

In addition, factory activity continued to grow in the U.S. Midwest in December, as purchasing managers reported rising prices and employment, even though production eased slightly.

Banks were the biggest gainers along with commodity-related sectors that sold off hard on Wednesday. The S&P financial index (.GSPF) rose 1.2 percent, while the capital goods sector (.GSPIC) added 1.1 percent.

Concerns over Europe's sovereign debt crisis resurfaced Wednesday, sparking a 1 percent drop in major indexes. The S&P 500's slim gains for the year were erased and the index pulled back below its 200-day moving average.

This year, the 200-day moving average has been a critical level for the S&P 500 as investors look for a significant break above that level before committing capital. The measure is often used to gauge the market's longer-term strength.

On the down side, initial claims for jobless benefits rose more than expected, giving a mixed labor picture, but investors said the trend was still lower.

Recent economic data, including reports on housing, have been largely positive, contributing to stocks' gains over the past month and the view that economic growth is picking up steam.

"We have seen a pretty encouraging trend in the U.S. economic data over the last two months," said Peter Jankovskis, co-chief investment officer of OakBrook Investments in Lisle, Illinois. "If that trend continues, that will provide good support and perhaps some upward momentum."

The next big test for markets in terms of U.S. economic data will be the December payrolls report at the end of next week.

For the year, the Dow is up 5.8 percent and the S&P 500 is up 0.1 percent, while the Nasdaq is down 1.7 percent.

Amazon.com Inc (AMZN.O) shares fell 0.3 percent to $173.32. Goldman Sachs said the online retailer's sales growth in the current holiday quarter could miss expectations.

Diamond Foods Inc (DMND.O) shares rose 7.2 percent to $31.55 after CNBC reported rumors that high-profile investor David Einhorn may have invested in the company.

Standard & Poor's placed Sears Holdings Corp's (SHLD.O) credit rating on review for a possible downgrade. It said plans to close at least 100 stores may not do much to improve its performance. The stock, down 0.8 percent at $33.05, has lost about one-third of its value over the last three days.

(Reporting By Angela Moon; Editing by Jan Paschal)

NEW YORK – Stocks weakened Wednesday, ending a five-day advance in the S&P 500 index, as new signs of strain emerged in the European banking system. The euro fell to its lowest level against the dollar in nearly a year and Treasurys rallied.

The Dow Jones industrial average lost nearly 140 points. The S&P is now negative for the year again, after barely turning positive on Friday.

The European Central Bank said banks had parked $590.72 billion with it overnight, surpassing the record set only Monday. That means European banks were less willing to take the risk of making short-term loans to each other, opting instead to earn low interest rates from the ECB. The disclosure also hurt the euro, which fell to $1.291, its lowest level against the dollar since January.

The worrying news from the ECB overshadowed two successful auctions of Italian government debt. Italy was able to pay much lower borrowing rates than last month. The strong demand from investors raised hopes that Italy would be able to avoid sinking into a financial crisis, as smaller countries like Greece and Portugal have.

John Merrill, chief investment officer at Tanglewood Wealth Management, said markets would remain vulnerable to flare-ups in Europe’s long-running financial crisis until leaders there come up with more convincing solutions for paying down their enormous debt loads and keeping the 17-nation currency union intact.

“We live in a Band-Aid world,” Merrill said. “Nobody really is addressing underlying issues.”

European leaders agreed at a summit Dec. 9 to forge closer fiscal ties over the long term, but investors are still worried that Greece might default on its debt or be forced to leave the euro bloc. A Greek exit from the currency union would likely cause huge disruptions for the country’s economy and losses for European banks that hold Greek government debt. Investors fear that could cascade into another global financial panic, as happened in 2008 following the collapse of the U.S. investment bank Lehman Brothers.

The Dow Jones industrial average fell 139.94 points, or 1.1 percent, to 12,151.41. Materials and energy companies led the declines. Alcoa Inc. fell 3 percent and Caterpillar Inc. fell 2.4 percent.

With only two more trading days left in the year, markets were thinly populated in a holiday-shortened week. Shares traded on the New York Stock Exchange totaled 2.3 billion, less than half of the usual volume.

The S&P 500 fell 15.79 points, or 1.3 percent, to 1,249.64. The Nasdaq composite declined 35.22 points, or 1.3 percent, to 2,589.98.

The yield on the 10-year Treasury note fell to 1.93 percent from 2 percent late Tuesday as investors moved money into less risky assets.

The Bank of Italy raised $11.8 billion in two bond auctions, reflecting investor approval of the country’s recently passed austerity measures. The yield on Italy’s six-month bill offering was half the interest rate the country paid in a similar auction last month. The yield on the country’s 10-year bond remained dangerously high, however, at 6.93 percent. It had risen to 7 percent Tuesday, a level that is considered unsustainable.

Italy is the euro zone’s third-largest economy and is considered too big to save under the euro zone’s current bailout funds. Investors have grown fearful over the past few months that Italy will find it difficult to pay off its massive debts, which stand at around $2.5 trillion.

The worries were reflected in U.S. bank stocks. Bank of America Corp. fell 3.5 percent, while Regions Financial Corp. fell 2.7 percent.

In other corporate news:

• Sandridge Energy Inc. stock declined 4.4 percent on news that it is selling drilling rights in two states to a Spanish energy company, Repsol YPF.

• Cavium Inc. fell over 1 percent, a day after the chipmaker said its fourth-quarter results will fall below its previous forecast.

NEW YORK (Reuters) – The S&P 500 erased its gains for the year on Wednesday as Wall Street reversed some of its recent year-end rally, with many investors expressing concern about the outlook for early 2012.

The Dow Jones industrial average (.DJI) dropped 82.65 points, or 0.67 percent, to 12,208.70. The Standard & Poor's 500 Index (.SPX) dropped 10.40 points, or 0.82 percent, to 1,255.03. The Nasdaq Composite Index (.IXIC) dropped 24.73 points, or 0.94 percent, to 2,600.47.

(Reporting By Edward Krudy)

NEW YORK (Reuters) – The S&P 500 turned positive for the year and closed out its third week of gains in four on Friday as equities extended their rally after a string of unexpectedly strong economic data.

The benchmark index has gained nearly 5 percent over its run of four straight winning days, putting it slightly higher for the year while volume continued to be seasonally light.

Investors cited recent improvement in U.S. economic data and seasonal factors behind the move, while a deal to extend the payroll-tax cut for two months added to the enthusiasm.

New U.S. single-family home sales rose to a seven-month high in November and the supply of houses on the market was the lowest in 5-1/2 years, giving hope for a recovery in the sector.

The day's big gainers included consumer discretionary (.GSPD) and information technology (.GSPT) stocks, both up 1.1 percent. Utilities (.GSPU), considered a defensive play, were the day's relatively weakest group, up 0.7 percent.

"The data have been improving, and that's leading to an improvement in investor sentiment, which is contributing to the more confident tone in the market," said Lawrence Glazer, managing partner at Mayflower Advisors in Boston.

"Also, there's something psychologically significant in our turning higher for the year."

The S&P 500 edged above its 200-day moving average, a level that has proved difficult to maintain after plummeting below it in August. However, low holiday-season volume means investors are wary of the move.

The U.S. Congress approved a two-month extension of a payroll-tax cut for 160 million workers that otherwise would have expired on December 31. The resolution, if only temporary, removes a market headwind that investors said could have hit growth next year.

The Dow Jones industrial average (.DJI) shot up 124.35 points, or 1.02 percent, to 12,294 at the close. The Standard & Poor's 500 Index (.SPX) rose 11.33 points, or 0.90 percent, to 1,265.33. The Nasdaq Composite Index (.IXIC) gained 19.19 points, or 0.74 percent, to end at 2,618.64.

For the week, the Dow gained 3.6 percent, the S&P 500 climbed 3.7 percent, and the Nasdaq advanced 2.5 percent.

Volume was light ahead of the extended Christmas holiday weekend, which could spark exaggerated market swings next week. The New York Stock Exchange observed normal trading hours, but the bond market closed early, at 2:00 p.m. EST.

Brian Battle, a trader at Performance Trust Capital Partners in Chicago, warned about reading too much into the market's recent run. He said he was cautious heading into the new year, with Europe's debt crisis unresolved, growth still weak, and a U.S. presidential election looming. Financials (.GSPF), the S&P 500's worst-performing sector this year, could continue to face amplified volatility.

"We should all be careful not to deem it as the end," he said. "We might take it all back in January."

SunPower Corp (SPWR.O) jumped 2.6 percent to $6 after the solar panels maker reached a deal to acquire rival Tenesol, a unit of France's Total SA (TOTF.PA). At the same time, Total is buying 18.6 million SunPower shares, raising its stake to about 66 percent.

Shares of Rambus Inc (RMBS.O) jumped 12.2 percent to $8.21. The company signed a patent-licensing deal with Broadcom Inc (BRCM.O), resolving all previous claims related to its technology.

WPX Energy Inc (WPX.N) will replace Compuware Corp (CPWR.O) in the S&P 500 index, with Compuware replacing Exterran Holdings Inc (EXH.N) in the S&P MidCap 400 index, Standard and Poor's said.

Exterran will replace Skyline Corp (SKY.N) in the S&P SmallCap 600 index. The changes are effective at the close of trading on Friday, December 30.

Compuware fell 0.2 percent to $8.31, Exterran slid 3 percent to $9.25, and Skyline dropped 6 percent to $4.41.

More than two-thirds of stocks traded on the New York Stock Exchanged closed in positive territory, while about 51 percent of Nasdaq-listed stocks closed higher.

(Reporting By Ryan Vlastelica; Editing by Jan Paschal)

NEW YORK (Reuters) – U.S. stocks are expected to end next year with modest gains, despite the threat of a global downturn brought on by the euro zone debt crisis and a tepid domestic economy that may still need more stimulus, a Reuters poll found.

Strategists polled had solid hopes for the U.S. economy and many cited historically low price-to-earnings ratios. But the euro zone crisis has battered stock markets this year and there was a wide range of views on where Wall Street is headed.

The Standard & Poor's 500 index (.SPX)(.INX) is expected to rise about 7.5 percent from Wednesday's close to 1,340 by the end of next year, according to a median forecast from over 40 respondents polled over the last week.

Forecasts range from a high of 1,550 to a low of 718, almost as low as the nadir of March 2009, when it touched 666. That 832-point spread was the widest in all of the quarterly Reuters polls since the financial crisis began in 2008.

But the benchmark index is expected to be about where it is now by mid-2012, following a tumultuous year that has it down a little under 1 percent since the close of 2010. Last year, it rose 12.8 percent.

Indeed, the S&P 500 has fallen in six of the past seven months, with many investors fearful of a hit to global growth if the crisis in Europe worsens or leads to euro zone breakup.

"The more Europe goes to the back burner, the more the market will rise," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco.

But that is a big if. Forecasts are decidedly less bullish than in the recent past, particularly for the big industrials. And U.S. economic growth is expected to be tepid next year at best, according to a recent Reuters poll.

The Dow Jones industrial average (.DJI) is expected to trade at 12,000 by the middle of next year, lower than Wednesday's close. It's expected to rise just 2.8 percent to 12,388 by the end of 2012.

Stocks have vacillated from despair to euphoria in the last two months, although most analysts generally agree that share prices are out of step with worries priced into government bonds.

Global indexes rallied on Wednesday after central banks around the world announced co-ordinated steps to prevent a credit crunch among banks in Europe struggling with the region's debt crisis.

The S&P surged to its best monthly performance in 20 years in October after euro zone leaders pushed for recapitalization of banks and to bolster the region's bailout fund.

Part of the reason for the tempered optimism is improving U.S. economic data, even though high unemployment persists and the housing market, ground zero of the financial crisis, remains in the doldrums.

Analysts also note that while U.S. companies may not be hiring much, they are sitting on huge piles of cash.

The S&P has a forward price-to-earnings ratio of 11.5, according to Thomson Reuters data. That compares with an average of 15 over the past decade.

"I've never seen the balance sheets of corporate America as strong as (they are) today," said Stanley Nabi, Vice Chairman at Silvercrest Asset Management Group in New York.

"The risk is not as high as people make it out to be."

(Reporting By Chuck Mikolajczak; Additional polling by Ashrith Doddi and Sumanta Dey; Editing by Jon Loades-Carter)

NEW YORK – Compensation consulting firm Johnson Associates is forecasting a less generous bonus season for Wall Street this year.

The firm said Tuesday that its third-quarter compensation analysis shows year-end incentives, which can be cash or equity awards, will drop an average of 20 percent to 30 percent compared with 2010.

That means most Wall Street professionals will receive smaller bonuses.

“This year started with great promise for a banner year on Wall Street, but hopes for larger bonuses faded over the summer and continue to dim as we approach year end,” said Alan Johnson, managing director of Johnson Associates.

Bonuses last fell sharply in 2008, after the collapse of investment bank Lehman Brothers triggered the financial crisis. Incentives rebounded the past two years, however, as the market recovered.

But this year, the combination of the lack of an economic recovery, plus heightened regulation and uncertain markets has prompted most financial services firms to reduce the size of bonuses, Johnson said.

The firm anticipates fixed-income traders will see the biggest drop, with bonuses expected to fall up to 45 percent, while incentive pay for equities traders and senior management will drop up to 30 percent.

Johnson Associates also projects investment bankers’ bonuses will tumble 20 percent, while incentive payouts elsewhere in the financial services industry will be flat.

For 2012, Johnson expects parts of the financial services sector will post a modest recovery. Assuming there isn’t major economic weakness and a a large bank or nation doesn’t collapse, investment and commercial bankers could see bonuses jump 15 percent or more next year, Johnson said.

He also anticipates financial services firms will continue to cut staff in the U.S., while adding employees in emerging markets.

The firm’s analysis is based on monitoring the financial services industry, public data from eight of the nation’s largest investment and commercial banks, and 10 of the largest asset management firms.