Stock Bulls Piggyback on Commodities Rally

Cyclical names such as Caterpillar(CAT Quote), Temple Inland (TIN Quote) and United Technologies (UTX Quote) rallied sharply as well, helping the Morgan Stanley Cyclical Index climb 1%.

"The big wind here is the dollar," says James Paulsen, chief investment strategist at Wells Capital Management. The dollar was strengthening through the early part of 2007, while the energy and commodity trade fell out of favor, he notes. At that time, investors poured money into large-cap technology stocks, which now suffer from cautious earnings guidance.

Speaking of which, shares of Yahoo!(YHOO Quote) were initially sliding in after-hours trading on soft earnings guidance. But the stock has since rebounded, recently up more than 5% in after-hours trading amid optimism about the long-awaited debut of Yahoo!'s Panama ad system. Yahoo! appears to be following the regular-session pattern of Texas Instruments (TXN Quote), which rose 3.5% despite offering weak first-quarter guidance.

Elsewhere, the homebuilders benefited from a Goldman Sachs upgrade to neutral from sell. The Philadelphia Housing Sector Index jumped 2.4%. Shares of homebuilders Centex(CTX Quote), D.R. Horton(DHI Quote) and Hovnanian(HOV Quote) added at least 2% apiece.

Tuesday, the dollar dropped to a two-week low against the euro and a 14-year low against the British pound, and breathing life back into basic materials and commodities, says Paulsen.

Rising commodities prices breed strength in commodity-producing emerging markets. Mexico and Brazil's benchmark indices jumped 1.5% Tuesday.