Stocks Weather Oil Gusher

Investors found reasons to buy stocks Wednesday, despite rising oil prices and what looked like a dismal housing report.

Traders latched onto a tasty tidbit in Wednesday's Commerce Department data. The government released an upward revision to third-quarter gross domestic product numbers, showing that corporate profits rose 30.9% from the same period last year. You have to go back to 1987 to find such a large increase in profit growth for a single quarter.

The Commerce Department also revised down its reading of wage pressure and core inflation in the third quarter, calming inflation fears that had re-emerged when Fed Chief Ben Bernanke and other Fed speakers made hawkish comments Tuesday.

The character of traders' re-entry Wednesday -- following Monday's bludgeoning -- shows the stock market's continuing optimism about the economy, even as the bond market seems to be predicting a slowdown.

"Most of this is money on the sidelines that was waiting for a pullback," says James Paulsen, chief investment officer at Wells Capital Management.

Small-cap and cyclical stocks led the rebound, while homebuilders and energy jumped sharply despite a rise in oil prices and weak housing data.

The small-cap Russell 2000 ended the day up 1.2%, while the Dow Jones Industrial Average gained 0.7% to close at 12,226.73. The S&P 500 added 0.9% to close at 1399.48, and the Nasdaq Composite finished up 0.8% at 2432.33.

Leading the Dow were Exxon Mobil(XOM Quote - Cramer on XOM - Stock Picks), Alcoa(AA Quote - Cramer on AA - Stock Picks), AT&T(T Quote - Cramer on T - Stock Picks) and Merck(MRK Quote - Cramer on MRK - Stock Picks), each of which gained 2% or more.

While the price of crude climbed for the fourth straight day, rising $1.47 to $62.46 per barrel, oil and energy stocks soared. Traders seem to be betting that the price of oil bottomed in the mid $50s.

The Oil Services Holdrs(OIH Quote - Cramer on OIH - Stock Picks) and the Energy Select SPDR(XLE Quote - Cramer on XLE - Stock Picks) exchange-traded funds jumped over 3% Wednesday. Shares of Chevron(CVX Quote - Cramer on CVX - Stock Picks) and Exxon hit all-time highs.

Traders have made a similar gamble on the housing market. A weaker-than-expected report on new home sales, detailing rising inventories and dropping prices, didn't dissuade investors from focusing on signs that the worst is over in the housing slump. Tuesday's existing-homes data showed an increase in sales as prices dropped, and Bernanke noted in his speech Tuesday that the housing market is "stabilizing."

The optimism sent shares of Toll Brothers(TOL Quote - Cramer on TOL - Stock Picks) and D.R. Horton(DHI Quote - Cramer on DHI - Stock Picks) up over 1% on the day. The Philadelphia Housing Sector Index jumped 1.2%.

In truth, the day's economic data could support a bullish or bearish argument for stocks. The market chose the bullish route when the Federal Reserve's beige book, or inter-meeting report on economic conditions, seemed to support a benign outlook. The report said most of the country is reporting moderate economic growth, with tight labor markets, strong consumers and resilient manufacturing conditions. The housing markets remained the soft spot.

The bond market sold off, slightly backing off its bet that there's been an end to interest rate hikes. The 30-year bond dropped 14/32 to yield 4.62%, while the 10-year fell 6/32 to yield 4.52%, and the two-year dropped 1/32 to yield 4.68%. With the 10-year around 4.5%, bond investors appear to believe the Fed not only will ease next year, but will ease two or three times.

Yet the beige book report was "balanced and argues more for the status quo than an ease in the first half of 2007," writes Mark Chandler, fixed-income strategist at Royal Bank of Canada Capital Markets.

One thorn in Wednesday's stock rebound was the Dow Jones Transportation Average, which slipped 0.3%, as the companies that ship stuff around the country don't like higher oil prices.

With retailers due to print November same-store sales Thursday, investors could soon be in a shopping mood again.