Stock Bulls Piggyback on Commodities Rally

The commodities trade was back in a big way Tuesday, bringing glee to many momentum traders, including one source who's been buying oil since it traded below $50 per barrel briefly last week.

Light sweet crude oil for March delivery jumped up 4.7% Tuesday to close at $55.04 per barrel on news President Bush will call for a doubling of the Strategic Petroleum Reserve in the State of the Union later tonight.

But it wasn't just oil that surged -- traders spent Tuesday piling back into everything that comes out of the ground, including natural gas, gold, silver, copper, and corn, among others.

Exactly where the chain reaction begins is not clear, but along with the commodities surge, the dollar sold off and emerging-market indices rallied. Other higher-risk trades that depend on investors believing in a strong economy and plentiful liquidity also rebounded.

Junk bond risk premiums tightened to their lowest average level in 10 years, and U.S. cyclically sensitive stocks rallied. The sum left all three major indices in the green for the day.

The Dow Jones Industrial Average gained 0.5% to close at 12,533.80, while the S&P 500 added 0.4% and the Nasdaq Composite gained just a fraction.

As oil rallied, shares of Exxon Mobil(XOM Quote), Valero Energy(VLO Quote), and Schlumberger(SLB Quote) rebounded, gaining anywhere between 2% and 4.2%.

With a surge in metals prices, Freeport MacMoRan(FCX Quote) and Phelps Dodge(PD Quote) gained 4.2% and 1.7%, respectively.