* Volatile trading before weekend Greek elections
* Spanish bond yields come off euro-era high
* Short interest on NYSE highest since October
* Michael Kors stock rallies after results, outlook
* Dow up 1.3 pct, S&P 500 up 1.2 pct, Nasdaq up 1.2 pct
By Edward Krudy
NEW YORK, June 12 (Reuters) - U.S. stocks took their cues
from Europe's troubled debt markets on Tuesday, staging a
comeback rally to end up more than 1 percent as Spanish bond
yields came off euro-era record highs.
Trading has been choppy this week as investors struggle for
clarity over whether the $125 billion bailout for Spanish banks
agreed over the weekend will be effective and have turned to
bond yields as a thermometer for risk aversion.
Economically sensitive sectors that had sold off recently
were the strongest performers, suggesting investors saw value in
beaten down shares, while traders looked for an oversold bounce
as the S&P 500 slipped back toward 1,300.
"We are just being held hostage by all the news flow," said
Frank Lesh, a futures analyst and broker at FuturePath Trading
LLC in Chicago. "I don't think anyone has a handle on this."
"Right now everyone has got a pretty short-term trading
mentality," he said. "You have to be ready to abandon your
thoughts and change your mind at a moment's notice."
Economically sensitive shares that rise and fall as fears
ebb and flow were the biggest gainers. Materials, financial and
industrial shares were up over 1.5 percent.
Boeing Co led the Dow, climbing 3.5 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 is close to flat, reflecting
the uncertainty in the market.
For the day the Dow Jones industrial average gained
162.57 points, or 1.31 percent, to 12,573.80. The Standard &
Poor's 500 Index rose 15.25 points, or 1.17 percent, to
1,324.18. The Nasdaq Composite Index added 33.34 points,
or 1.19 percent, to 2,843.07.
The S&P financial sector gained 1.7 percent, almost
reversing Monday's decline. Bank of America Corp said it
will reduce its long-term debt by about $40 billion in the
second quarter, reducing its interest expense by $230 million
per quarter. Its shares rose 2.9 percent to $7.49.
The S&P 500 index lost 6.3 percent in May on concerns about
the European financial crisis and signs of an economic slowdown
in the United States and China.
Despite initial enthusiasm over the EU aid package for Spain
agreed over the weekend, the S&P fell more than 1 percent on
Monday on questions about the terms of the bank-rescue deal and
the impact it could have on Spanish debt levels.
Trading was volatile during the day. Wall Street dipped
earlier as yields on Spain's 10-year bond hit 6.86 percent, the
highest level since the 1999 launch of the euro, pointing to
stress in the nation's debt markets shortly after the bailout
deal was agreed.
With the news flow so uncertain many traders are taking
their cues from market levels, with 1,300 on the S&P 500
emerging again as a focus this week.
"We held 1,300 on the S&P, so OK I'll buy against it and
here's what you got," said Lesh. "But do I have any confidence
to be holding the positions or feel comfortable with it short or
long? This stuff reverses against you and usually overnight."
"At this point I have at least a break-even stop so if the
market does reverse it takes me out with no loss or a minimal
loss," he said.
Volume was low for a third day. Around 6.2 billion shares
traded hands on the NYSE, the Amex and the Nasdaq, about 12
percent below the 20-day moving average.
Data late Monday showed that short interest on the NYSE
jumped 6.1 percent to 14.3 billion shares in late May, the
highest level since early October, indicating an increased
expectation that stocks will fall.
Investors are also staring down the barrel of upcoming
elections in Greece. The ballot on Sunday 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's certainly possible that we recover all the May losses,
I think that is on the table," said Peter Jankovskis, co-chief
investment officer at OakBrook Investments LLC in Lisle,
Nasdaq halted short sales of Zynga Inc as
shares of the social gaming company plummeted 10.3 percent on
increased concerns that the craze for games on Facebook
has already peaked. The stock was the most traded on Nasdaq.
Also in company news on Tuesday, shares of Michael Kors
Holdings Ltd jumped 7.6 percent to $41.10 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.