Retailers, oil companies fuel market rally

NEW YORK (Reuters) - U.S. stocks rose the most in more than a month on Thursday after Wal-Mart and other retailers posted stronger-than-expected May sales and data showed a surprising fall in weekly jobless claims, spurring optimism about the economy's health.

Energy stocks gave the biggest boost to the Dow and the S&P 500. The price of oil roared back from a three-week low as a big drop in the dollar forced traders to backtrack from bets that crude had further to fall.

A rare mega-deal in the telecommunications sector added to the positive tone. Verizon Wireless said it will buy rural mobile phone provider Alltel Corp for $28.1 billion, including debt.

Wal-Mart Stores' (WMT.N) shares jumped to a four-year high after the world's largest retailer reported a stronger-than-expected increase in sales at U.S. stores open at least a year. It said some of the gains resulted from rebates that consumers began receiving in late April under the government's $152 billion economic stimulus package. The S&P Retail Index .RLX surged 1.9 percent.

Wal-Mart and Costco (COST.O) "really caught everybody's eyes. Those were welcome in that we see that the consumer is still spending," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama. But on the other hand, he said, it also highlighted the trend of consumers trading down and shopping at cheaper stores.

Stocks heavily influenced by economic cycles, such as Hewlett-Packard (HPQ.N) and Alcoa (AA.N), responded strongly to data showing the number of U.S. workers filing new jobless benefit claims last week unexpectedly fell. A Morgan Stanley index of cyclical stocks .CYC gained 1.8 percent.

The Dow Jones industrial average .DJI rose 213.97 points, or 1.73 percent, to close at 12,604.45, while the Standard & Poor's 500 Index .SPX gained 26.85 points, or 1.95 percent, to 1,404.05. The Nasdaq Composite Index .IXIC jumped 46.80 points, or 1.87 percent, to finish the day at 2,549.94.

For the Dow and the S&P, it was the best daily percentage change since mid-April, while it was the Nasdaq's best day since May 1.

Hewlett-Packard shares rose 3.6 percent to $48.51 and Alcoa shares rose 3 percent to $40.08.

Among big oil companies, Exxon Mobil (XOM.N) shares rose 4.2 percent to $89.31, while rival Chevron Corp (CVX.N) added 4.1 percent to $99.99. At the close, Chevron and Exxon led the Dow's list of top-weighted gainers, while among the S&P 500, Exxon was first and Chevron was second.

Wal-Mart shares rose 3.7 percent to $59.80 and ranked among the stocks giving the biggest boost to the Dow. The shares had earlier climbed as high as $59.90, a level not seen since 2004.

Costco gave a boost to the Nasdaq, gaining 3.8 percent to $73.50 after the warehouse club also posted a rise in same- store sales that topped forecasts.

Shares of Verizon Communications (VZ.N), which owns 55 percent of Verizon Wireless, surged 5.4 percent to $38.96. The acquisition would move Verizon into first place in the U.S. market, ahead of AT&T Inc (T.N).

Airline shares rose even as the price of oil soared, after Lehman Brothers upgraded the U.S. airline sector, saying industry restructuring was coming at an accelerated pace. UAL (UAUA.O), the parent of United Airlines, climbed 10.6 percent to $10.11 on Nasdaq. Northwest Airlines Corp NWA.N advanced 15 percent to $8.06 on the NYSE.

Several airlines are reducing work forces and domestic fleets as the industry grapples with soaring fuel costs and a weakening economy.

Continental Airlines Inc (CAL.N) rose 4.8 percent to $15.20 after it said late Thursday it would cut 3,000 jobs, or about 6.5 percent of its work force, and retire 67 older planes as it scales down in the face of rising fuel prices.

The market briefly pulled back from its highs of the session in mid-afternoon, after credit ratings agency Standard & Poor's cut the top ratings of bond insurers Ambac Financial Group (ABK.N) and MBIA Inc (MBI.N) keeping alive unease about more credit losses. The two stocks rose, but largely on short-covering and following a sharp drop on Wednesday when Moody's Investors Service said it may cut the two bond insurers' ratings.

Trading volume was low on the New York Stock Exchange, with about 1.29 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.25 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks trumped declining ones by almost 4 to 1 on the NYSE and by 3 to 1 on the Nasdaq.

(Additional reporting by Deborah Lee; Editing by Jan Paschal)