Market Update: Stocks Rally Day After Rate Cut

(Updated from 12:26 p.m.)

Some breaking news about Microsoft(MSFT - Cramer's Take - Stockpickr) hit in the middle of stocks' rate-cut rally the day after the Fed cut short-term interest rates by 25 basis points.

Trading was halted on shares of Microsoft after a U.S. Appeals Court overturned a ruling splitting the corporation in two, though it upheld a judge's finding that the company had illegally defended its Windows monopoly. Microsoft was trading higher, to $74.96 at 11:35 a.m. EDT before trading was stopped.

The court also disqualified U.S. District Judge Thomas Penfield Jackson from the case, citing "offensive" comments he made to reporters.

The Microsoft news certainly didn't hurt the indices' rally -- in fact, it's expected to add to today's gains when trading is resumed. The Dow Jones Industrial Average was lately rising 191 points, or 1.8%, to about 10,626, while the Nasdaq Composite Index was adding 61.4 points, or 2.97%, to 2136. The S&P 500 was gaining 19.99 points, or 1.7%, to 1231. The major indices finished mixed yesterday (the Nasdaq closed up, the Dow finished down), as investors shrugged off the sixth interest-rate cut this year.

"People are trying to lull themselves into thinking the economy is OK," said Jim Volk, co-director of institutional trading at D.A. Davidson. "But there is no earnings visibility." Increasingly, investors are looking for signs the Fed's aggressive rate cutting is taking hold, yet they haven't gotten many from corporate America.

After the bell yesterday, networking systems provider Redback Networks (RBAK - Cramer's Take - Stockpickr) warned that its second-quarter loss would be wider than Wall Street expected, due to a sharp downturn in the telecommunications market. Redback was recently off 20.8% to $8.95.

Similarly, software developer Macromedia (MACR - Cramer's Take - Stockpickr) said it expects to post a loss for its first quarter because of a weak Internet market. Analysts had expected the company to turn a profit for the period. Macromedia was lately off 8.8% to $17.07.

"The market continues to tiptoe through a minefield of earnings warnings," said Bryan Piskorowski, market commentator for Prudential Securities. "The fact that the market is trading higher means that the earnings news is discounted." But he adds that investors want to see a pickup in the economy.

Investors got a mixed picture this morning on the employment front. The government reported that initial jobless claims fell last week, but the total number of people on the unemployment roster continued to grow. Initial claims for the week ended June 23 fell to 388,000, from 404,000 in the prior week. Economists had expected claims to rise to 412,000.

Once again, the ongoing $41.2 billion General Electric (GE - Cramer's Take - Stockpickr) takeover of Honeywell (HON - Cramer's Take - Stockpickr) was making headlines. In a last-minute effort to win the approval of European regulators, GE said it would divest 19.9% of its aircraft-leasing operation, GE Capital Aviation Services. Honeywell was lately jumping on the news, because it revives the chances the deal could happen. It was lately up 5.6% to $39.06. GE was adding 0.3% to $48.40. Both companies are Dow components.

Some of the bigger gains this morning were in sectors that typically gain in a rate-cutting environment. The American Stock Exchange Broker/Dealer Index was adding 2.5%, for example, while the S&P Retail Index was up 2.7%.

Yesterday's move by the Federal Open Market Committee brings short-term interest rates to 3.75%, their lowest level since May 1994. In its statement announcing the rate cut, the Fed said the economy is still at risk for weakness, leaving open the possibility for more cuts. But the Fed signaled that it could be near the end of its easing cycle.

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