Dow Dances to Mergers' Song

Meanwhile, Merrill upgraded GM to buy, citing the automaker's strong liquidity. GM gained 2.6% Tuesday, and the stock is up 19% year to date and 66.5% over the past 12 months. Investors focused less on Merrill's simultaneous downgrade of Ford(F Quote), though shares of the company fell 2.5%. The transports average added 1.5% on the day.

3M's announcement of the biggest buyback in its history sent shares of the conglomerate up 2.4% and also helped boost overall market sentiment. The S&P 500 added 0.8% on the day to close at 1444.26, while the Nasdaq Composite rose 0.4% to close at 2459.88.

But it was M&A that fired Tuesday's rally.

"Acquisitions don't happen at bottoms," says Patel. "They happen when the target stock has moved up, but not all the way up. It indicates the buyers are optimistic about the basic business. If you're heading into an economic downturn, you're not going to buy a company, borrow money, and go through it."

Speculation about Alcoa comes on the heels of another recently announced, albeit smaller, metals merger. Indian aluminum and copper company Hindalco Industries announced over the weekend that it has offered $5.9 billion for Canadian aluminum producer Novelis(NVL Quote). Novelis was up 0.4% Tuesday after surging 13% Monday.

Other metals companies rose in concert with Alcoa. Copper maker Freeport McMoRan(FCX Quote), which is in the process of buying Phelps Dodge(PD Quote) for $25.9 billion, rose 5.5% on the day. Phelps gained 1.8%.