Wall Street climbs in first session of 2011

Traders work on the floor of the New York Stock Exchange early in the trading session in New York January 3, 2011.

NEW YORK (Reuters) - Stocks greeted the new year with a rally on Monday as encouraging signs about the outlook for manufacturing around the world prompted investors to inject new money into the market.

Data from the United States, Europe and China set the tone, helping the Dow and S&P reach new two-year highs and the Nasdaq 100 closed at its highest in nearly 10 years, but some investors think caution may be warranted in the short term.

Financials led the way higher after underperforming the market last year. Bank of America Corp jumped 6.4 percent to $14.19 after it agreed to pay $2.8 billion to mortgage finance giants Fannie Mae and Freddie Mac to settle claims over soured mortgages.

Overall, stocks got a boost from the "January effect" when fund managers are no longer engaged in year-end window dressing and instead focus on stocks they find attractive.

"There is a lot of money in cash, a lot of money in bonds that would like out of bonds, and it's only natural with the economic improvement it's finding its way to equities," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

The Dow Jones industrial average gained 93.24 points, or 0.81 percent, to 11,670.75. The Standard & Poor's 500 Index rose 14.23 points, or 1.13 percent, to 1,271.87. The Nasdaq Composite Index climbed 38.65 points, or 1.46 percent, to 2,691.52.

While the uptrend remained intact, the market has become overstretched in the short term, with the 14-day relative strength index suggesting the S&P 500 could struggle from here.

"With the overbought condition we have, we could see some profit taking creep in or short-term weakness," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

"But with the economic fundamentals still improving, more risk being assumed by traders and individual investors and with the Fed standing ready to print more money, there's no reason why we can't become more overbought."

Analysts said that, historically, a strong first day bodes well for the market's performance for the year.

Based on data since 1945, if the S&P 500 is up on the first trading day of the year, it ends the year higher 74 percent of the time, with an average annual gain of 10.6 percent, according to Birinyi Associates Inc. in Stamford, Connecticut.

If stocks end the month of January higher, then 73 percent of the time the index rises for the year, based on data since 1929, Howard Silverblatt, an analyst at Standard & Poor's, said.

U.S. stocks ended 2010 with double-digit gains, and the S&P 500 recorded its best December since 1991. The gains marked a recovery to September 2008 levels before the fall of Lehman Brothers.

Data showed the U.S. manufacturing sector grew for a 17th straight month in December, while U.S. construction spending increased in November to its highest level since June.

The global outlook also was bolstered after data showed China's factory inflation cooled in December, while manufacturing in Europe accelerated.

The Nasdaq 100's gain was driven largely by Apple Inc, which rose 2.2 percent to $329.57. Oppenheimer raised its estimates and price target on company. It was the highest close for the index since February 2001.

Alcoa Inc gained 2.7 percent to $15.80 after Deutsche Bank upgraded the stock.

About 7.7 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq. Advancing stocks outnumbered declining ones on the NYSE by 2,236 to 791, while on the Nasdaq, advancers beat decliners 2,053 to 636.

(Additional reporting by Chuck Mikolajczak and Caroline Valetkevitch; Editing by Kenneth Barry)