Wall Street bounces, takes cue from Spanish yields

NEW YORK (Reuters) - Stocks continued to take their cues from Europe's troubled debt market on Tuesday, staging a comeback rally as volatile Spanish bond yields came off earlier highs.

Trading has been choppy this week as investors agonize over the effectiveness of the $125 billion bailout for Spanish banks agreed over the weekend.

Economically sensitive cyclical sectors that had sold off recently were the strongest performers, suggesting investors were seeing value in the market, while traders were looking for an oversold bounce as the S&P 500 slipped back toward 1,300.

Materials, financials and industrial sectors all gained more than 1 percent. Boeing Co led the Dow, climbing 3.4 percent, helped by an upgrade by Sanford C. Bernstein, which said it saw a better outlook for the company's new Dreamliner plane.

For the week so far, the S&P 500 has lost 0.5 percent.

"We are watching and waiting to see what comes out of Europe just like everyone else," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

The Dow Jones industrial average gained 125.34 points, or 1.01 percent, to 12,536.57. The Standard & Poor's 500 Index rose 10.53 points, or 0.80 percent, to 1,319.46. The Nasdaq Composite Index added 22.53 points, or 0.80 percent, to 2,832.26.

The S&P 500 index lost 6.3 percent in May on concerns about the European financial crisis and signs of a U.S. economic slowdown.

Even after the EU aid package for Spain agreed over the weekend, the S&P fell more than 1 percent on Monday as questions remained about the terms of the bank-rescue deal and the impact it could have on Spanish debt levels.

Trading was volatile on Tuesday. Wall Street dipped earlier as yields on Spain's 10-year bond hit a euro-era high, pointing to stress in the nation's debt markets shortly after the bailout deal.

Investors are also staring down the barrel of upcoming elections in Greece. The weekend ballot is viewed as a major risk that could result in the country leaving the euro zone, but it could also spark a rally if the outcome favors Greece's bailout agreement with international lenders.

"It is nice to see us holding above 1,300 (on the S&P), which is an important number psychologically, but it is very possible that we see another disappointing sell-off like yesterday," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York,

Nasdaq halted short-sales of Zynga Inc as shares of the social gaming company plummeted 11.8 percent on increased concerns that the craze for games on Facebook has already peaked.

Volatility around the close of European markets is expected to persist until more clarity is received on the makeup of Greece's government and the stability of Spain's banking system.

In company news on Tuesday, shares of Michael Kors Holdings Ltd jumped 5 percent to $40.07 after the designer clothing company reported a stronger-than-expected fourth-quarter profit and gave a full-year outlook that exceeded Wall Street's forecast.

(Editing by Leslie Adler)