Why the Dow Ticked Up Today

The Dow Jones Industrial Average (INDEX: ^DJI  ) nosed higher by 77.9 points -- 0.6% -- to 13,515.04 today, slipping from a morning rally that almost touched 13,600. The Dow beat out the S&P 500, which posted a modest gain of 0.25%, and the Nasdaq Composite Index, which ended the day slightly down.

Booming highs early in the day came off positive manufacturing news, as the Institute for Supply Management's Purchasing Managers Index showed that American manufacturing activity in August broke a three-month contraction skid, posting its first increase since May. The PMI's rating of a 51.5 -- where numbers above 50 indicate manufacturing purchasing expansion -- beat out expectations of 49.7, which would have indicated a fourth straight month of contraction. Wall Street analysts often use the PMI as a prediction of an outlook of the future economy, so the latest rating lends strength to the continuation of the U.S. economic recovery.

After last Thursday's 13% drop in durable-goods orders, Wall Street heartily welcomed the news, as the Dow rocketed up in the first hour of trading. International PMI indicators also buoyed the positive manufacturing sentiment, as manufacturing contraction slowed for both the eurozone and China in August. However, the eurozone's manufacturing contraction still invited investor caution with a reading of 46.1 -- indicating the possibility of a renewed recession in the region.

The Dow retreated in the afternoon session, giving back some of its gains after Federal Reserve Chairman Ben Bernanke's defense of the Fed's renewed stimulus plan. Bernanke announced that he didn't expect the U.S. economy to dip into recession, but he does worry about economic growth in the face of sluggish job creation and a high unemployment rate.

The CBOE Volatility Index (INDEX: ^VIX  ) , or the "fear index" that tracks volatility in the markets, subsequently rose almost 4% after sinking below 16 earlier in the day.

Financial stocks led the Dow higher, as Bank of America (NYSE: BAC  ) , JPMorgan Chase, and American Express (NYSE: AXP  ) all rose more than 1%. With the Fed launching its third round of quantitative easing, financial institutions look to continue third-quarter gains on the back of a steady stream of cash infusions from the Fed and other global central banks. The positive manufacturing news surely helped the financial institutions as well, as greater manufacturing output could lead to higher corporate borrowing.

New Dow member UnitedHealth Group led all Dow stocks, rising 1.9%. Meanwhile, Microsoft (Nasdaq: MSFT  ) led the Dow's four laggards, falling around 0.8% after experiencing setbacks with software provider Intel for its new Windows 8 operating system.

Looking for what's ahead for the Dow? Check out The Motley Fool's guide to the safest stocks on the Dow in our free report, "The 3 Dow Stocks Dividend Investors Need."

Fool contributor Dan Carroll holds no positions in the stocks mentioned in this article. The Motley Fool owns shares of Bank of America and Microsoft. Motley Fool newsletter services have recommended buying shares of Microsoft, creating a synthetic covered call position in Microsoft, and creating a write covered strangle position in American Express. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy. 


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