Stocks cling to gains

Financial shares rallied Thursday on the back of global efforts to stabilize the banking industry, but the broader market struggled after the latest grim readings on the economy.

New home sales plunged to an all-time low in January and the number of Americans filing new claims for unemployment hit a 26-year high last week. GM's huge quarterly loss added to the auto sector's woes.

The Dow Jones industrial average (INDU) gained 45 points, or 0.6%, more than two hours into the session. The S&P 500 (SPX) index rose 5 points, or 0.6%. The Nasdaq composite (COMP) advanced 1 point, or 0.1%.

Stocks had posted gains through the morning, but by midday, only the blue chips remained in positive territory.

"We had a good start today, but it's already giving a lot of it back," said Greg Church, president of Church Capital.

He said that the banks and the broader market were advancing on hopes that the various plans to help the financial sector will work. But those hopes could be dashed if more details don't emerge soon.

"I think we still don't know enough about how these various plans are going to work and when they will start to work," he said. "Until we do, it's going to be hard for the market to really get going."

In Washington, President Obama presented a budget summary for fiscal 2010 to Congress on Thursday, with a detailed account due in April. The roughly $3.55 trillion spending plan is for the fiscal year beginning in October.

The government is forecasting a $1.75 trillion deficit for the 2009 fiscal year and a $1.17 trillion deficit for the 2010 fiscal year. Obama has said he plans to cut the deficit inherited from former President George W. Bush in half by 2013.

Economy: New home sales plunged to an annual unit rate of 309,000 in January, the worst level since the government began keeping records in 1963. Economists thought sales would fall to 324,000 in the month, according to a Briefing.com survey. Sales stood at a 344,000 annual unit rate in December.

An earlier report showed that weekly jobless claims rose to a fresh 26-year high last week of 667,000 versus forecasts for a drop to 625,000. Claims stood at a revised 631,000 in the prior week.

Durable goods orders fell to a 6-year low in January, declining for the sixth straight month, the government reported. Orders fell 5.2% in January versus forecasts for a drop of 2.5%. Orders dropped a revised 4.6% in December.

Financials: JPMorgan Chase (JPM, Fortune 500) said that its expects steeper home-equity loan losses this year and that it will cut more jobs related to its purchase of Washington Mutual. Shares jumped 11%.

Citigroup (C, Fortune 500) is close to finalizing a deal for the government to increase its stake in the troubled bank to as much as 40%, according to reports. A deal could be announced as soon as Thursday. Citi shares gained 3%.

Worries that the U.S. government will have to fully take over hard-hit banks like Citigroup have dragged on stocks for weeks, although Fed Chairman Ben Bernanke sought to temper such fears in his address to Congress Tuesday.

On Wednesday, Treasury offered more details on its plan to "stress test" banks for potential losses should the economy worsen. Tests of the 19 largest banks will be used to determine what future bailouts may be necessary.

On Thursday, Obama's budget outline included $250 billion to be added to the already in existence $700 billion bank bailout plan.

Britain announced a plan Thursday to insure at least £600 billion ($854.2 billion) of banks' toxic assets, the Wall Street Journal reported, as it looks to restart lending and avoid fully nationalizing banks.

Royal Bank of Scotland (RBS) will dump £325 billion ($462.7 billion) in bad debt into the government program. RBS posted an annual loss of £24.14 billion ($34.4 billion), the biggest loss in British corporate history. In addition to participating in the government program, RBS announced a huge restructuring plan and said it will sell off certain assets. Shares gained 22% in U.S. trading.

GM: The beleaguered automaker reported a massive $9.6 billion quarterly loss in the fourth quarter, in a period in which its sales plunged and it needed a federal bailout to stay afloat. GM (GM, Fortune 500) shares were little changed. (Full story)

Market breadth was positive. On the New York Stock Exchange, winners beat losers by almost three to one on 475 million shares. On the Nasdaq, advancers topped decliners two to one on volume of 800 million shares.

Bonds: Treasury prices tumbled, raising the yield on the benchmark 10-year note to 3.0% from 2.92% Wednesday. Treasury prices and yields move in opposite directions.

Lending rates were little changed. The 3-month Libor rate was 1.26%, unchanged from Wednesday and the overnight Libor rate rose to 0.28% from 0.27%, according to Bloomberg.com. Libor is a bank lending rate.

Other markets: In global trading, Asian markets slumped and European markets rallied in afternoon trading.

In currency trading, the dollar fell versus the euro and gained against the yen.

U.S. light crude oil for April delivery rose $2.20 to $42.70 a barrel on the New York Mercantile Exchange.

COMEX gold for April delivery fell $32.60 to $933.60 an ounce.