NEW YORK (Reuters) ? Wall Street bounced more than 2 percent on Wednesday, reversing three days of losses after Germany's top court smoothed the way for Berlin's participation in bailouts that could ease Europe's debt crisis.
But investor caution that there remains a long road to recovery was underscored by light trading and continued high volatility as shown in the CBOE VIX volatility index (.VIX).
In almost a mirror image of the previous session, financial stocks rebounded sharply, with the KBW Bank Index (.BKX) up nearly 6 percent. Bank of America Corp (BAC.N) jumped 7 percent, helped by a management shake-up.
European stocks rallied off a two-year low after the German court rejected lawsuits aimed at blocking the country from joining efforts to aid Greece and other nations. Germany's DAX (.DAX) index leapt more than 4 percent.
Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey, cautioned that although valuations are more attractive after a 12 percent decline in the S&P 500 index since April, uncertainty over the festering European debt crisis and the path of the U.S. economy will continue to dog Wall Street.
"This is just another step in a long road," he said. "We'd really like to see some improvement in some of the data, and we're just not there yet."
The Dow Jones industrial average (.DJI) gained 275.56 points, or 2.47 percent, to 11,414.86. The Standard & Poor's 500 Index (.SPX) rose 33.38 points, or 2.86 percent, to 1,198.62. The Nasdaq Composite Index (.IXIC) added 75.11 points, or 3.04 percent, to 2,548.94.
Volume was just 7 billion shares on the NYSE, Amex and Nasdaq, among its lightest readings over the last month and well below last year's average of 7.56 billion.
Bank of America (BAC.N) rose 7 percent to $7.48 and was the top percentage gainer on the Dow after the heads of its consumer banking and global wealth and investment management units left. Bank of America has lost almost half of its market value this year.
"The financials have been pounded mercilessly, and we're starting to get a real bid under their valuation," said Howard Ward, chief investment officer at GAMCO Growth in Rye, New York. "That's a huge positive."
The CBOE Volatility index (.VIX) fell 9.6 percent after spiking 9 percent on Tuesday but still remained over 30, a level often seen as a warning sign for equity markets. The index usually moves inversely to the S&P 500.
"The complete impetus for this rally was the severe oversold condition that had emerged over the previous three days of heavy selling," said Larry McMillan, president of McMillan Analysis Corp in a report.
"The indicators are mixed, and volatility remains high -- correctly warning of the dangers of this market," he said.
The total put-to-call ratio for all listed options finished at 0.91 on Wednesday, below the 22-day moving average of 1.15, according to option analytics firm Trade Alert. The ratio is the lowest level in one month when the ratio is adjusted for ex-dividend trading in call options.
"Many consider a high put-to-call ratio to be a sign of a market bottom. So today's reading could be interpreted as a sign of a market top," said Trade Alert president Henry Schwartz.
Shares of energy companies, a sector closely tied to economic growth, were also higher. The S&P energy index (.GSPE) rose 3.7 percent while the price of U.S. crude rose $3 to a five-week high Wednesday,
Yahoo Inc (YHOO.O) shares gained 5.4 percent to $13.61 after its chairman, Roy Bostock, abruptly fired Chief Executive Carol Bartz on Tuesday, ending a tumultuous tenure marked by stagnation and a rift with Chinese partner Alibaba.
Darden Restaurants Inc (DRI.N) was the biggest loser on the S&P 500, falling 3.6 percent to $44.54 a day after the operator of the Red Lobster and Olive Garden restaurant chains warned that Hurricane Irene hurt its fiscal first-quarter earnings.
Nvidia Corp (NVDA.O) climbed 8.1 percent to $14.25 a day after the chipmaker forecast 2013 sales that topped market expectations.
About 88 percent of stocks traded on the New York Stock Exchange were in positive territory, while 83 percent of stocks on the Nasdaq rose.
(Additional reporting by Doris Frankel; Editing by Leslie Adler)
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