Blue Chips Bounce Back

Falling oil trumps some soft economic data.
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Updated from 4:20 p.m. EDT

Investors rotated into blue chips with enthusiasm Monday, taking advantage of a weeklong fall in oil prices to celebrate a mostly positive economic picture.

The

Dow Jones Industrial Average

closed with a gain of 112.17 points, or 1.11%, to 10,252.29. The

S&P 500

added 11.64 points, or 1.01%, to 1165.69. The

Nasdaq Composite

rose 17.65 points, or 0.89%, at 1994.43. The 10-year Treasury note was down 1/32 in price to yield 4.13%, while the dollar fell against the yen and euro, ending a three-day rally.

"People are still repositioning themselves, looking for something to take the lead and ensure the most potential value, much like technology did last week," says Robert Pavlik, portfolio manager with Oaktree Asset Management.

About 1.86 billion shares changed hands on the

New York Stock Exchange

, with advancers beating decliners by a 3-to-1 margin. Trading volume on the Nasdaq was 1.39 billion shares, with advancers outpacing decliners 3 to 2.

"The market is playing catch-up to last week's good economic news," including upbeat retail sales and trade-deficit numbers, says Peter Cardillo, chief market analyst with SW Bach & Co.

Crude prices spent most of the session lower before bouncing toward the close and settling down just 6 cents to $48.61 on the June contract. The rebound reversed some early pain in energy-related stocks like

ExxonMobil

(XOM) - Get Report

, which had been down 1.5%,

Valero

(VLO) - Get Report

, which had tumbled almost 5%. Exxon finished down 35 cents to $53.35, while Valero was off $1.10 to $60.66.

The dollar reversed ground and fell after the Treasury Department said overseas investors bought a net $45.7 billion in U.S. government and corporate stocks and bonds in March, the smallest monthly amount since 2003. The figure compares with net purchases of $84.1 billion in February and reflected selling in Japan and China.

Meanwhile, the New York Empire State index dropped to minus 11.1 in April from 2.0 in March, far below the consensus 11.7 and the lowest reading since April 2003.

"The survey is much weaker than we expected and it supports our view that the soft patch is not over," says Ian Shepardson, chief economist with High Frequency Economics. "The survey weakened across the board, with most of the subindexes hitting their lowest levels since the Iraq war."

Energy, materials and utilities were the only three weaker sectors Monday. Stronger areas included financial, health care, retail, semiconductors and homebuilding.

"This is expiration week, and if you look at the pattern, typically we've seen a market that's better to buy," says Dave Briggs, head of equity trading with Federated Investors. "There are no other real drivers or news-dominating items today."

Stocks are coming off a volatile week in which rumors of various hedge fund difficulties sent blue chips reeling. The Dow lost 2% over the previous five sessions to end at 10,105, while the S&P 500 lost 1.5% to 1154. The Nasdaq bucked the trend, rising 0.9% to 1967 on solid earnings from

Dell

(DELL) - Get Report

and

Cisco Ssytems

(CSCO) - Get Report

.

Among the marquee names with news at this week's meeting of the American Society of Clinical Oncology were

Genentech

(DNA)

, which highlighted the efficacy of Avastin in treating lung and colon cancer;

Pfizer

(PFE) - Get Report

, whose Sutent showed promising results in stomach and kidney cancer; and

Onyx Pharmaceuticals

(ONXX)

, which along with partner

Bayer

(BAY)

published a trial highlighting Sorafenib in renal-cell carcinoma.

In other corporate news,

US Air

(UAIRQ)

and

America West

(AWA)

reportedly are nearing a merger agreement and could announce a deal sometime this week. Media reports pegged the transaction around $1 billion, including a $500 million private equity investment from hedge funds.

Also,

UPS

(UPS) - Get Report

said Monday that it is acquiring trucking firm

Overnite

(OVNT)

for roughly $1.25 billion in cash. Overnite stockholders will receive $43.25 for each Overnite share, a 46% premium compared to the stock's closing price of $29.58 on Friday. Shares of Overnite added $12.94, or 43.7%, to $42.52. UPS was up $1.03, or 1.4%, to close at $73.18.

"The M&A activity definitely helped to push the Empire State index data aside," Pavlik says. "People saw that if UPS was taking a stand to buy a company, then there's value out there for investors."

Lowe's

(LOW) - Get Report

said first-quarter earnings rose 31% from a year ago to $590 million, or 74 cents a share, on a 14% rise in sales to $9.91 billion. Analysts were predicting earnings of 76 cents a share on sales of $9.97 billion. Lowe's rose $2.94, or 5.5%, to $55.80.

Meanwhile, rival

Home Depot

(HD) - Get Report

rose 3% ahead of reporting its first-quarter earnings tomorrow. The company is expected to earn 55 cents a share, up from 49 cents a share a year ago. Shares of Home Depot were up $1.08 to finish at $37.37.

Wal-Mart

(WMT) - Get Report

, whose earnings miss last week contributed to the blue-chip downdraft, maintained its forecast for same-store sales growth in May. The retailer sees comps up 2% to 4% in the four weeks to May 27 and said food was its strongest segment last week. Wal-Mart gained 9 cents, or 0.2%, to $47.22.

Limited Brands

(LTD)

reported a 76% decline in first-quarter earnings and guided estimates lower for the rest of the year. Sales were $1.98 billion, unchanged from a year ago. Still, Limited rose 2 cents, or 0.1%, to $20.45.

PacificNet

(PACT)

said that first-quarter net income rose to $415,000, or 4 cents a share, from $141,000 a year ago. Analysts had expected the company to earn 3 cents a share, according to Thomson First Call. Revenue rose to $9.1 million from $3.5 million last year. The outsourcing company also reiterated its 2005 guidance. PacificNet was up $1.04, or 14%, to close at $8.49.

Shares of

Cell Therapeutics

(CTIC) - Get Report

were lower Monday despite preliminary data from a study showing that Xyotax in combination with carboplatin produced a major tumor response in 98% of first-line ovarian cancer patients. The stock fell 7 cents, or 2%, to $3.48, having opened trading at $3.85.

Payment processor

iPayment

(IPMT)

said its chairman and CEO, Gregory S. Daily, has offered to buy out the company for $38 a share in cash. Daily's proposal values iPayment at more than $640 million. A committee of four outside directors will evaluate the bid, which represents a 20% premium to the stock's closing price Friday of $31.55. iPayment added $6.74, or 21.4%, to $38.29.

In brokerage action, Prudential downgraded

General Motors

(GM) - Get Report

to neutral weight from overweight. Prudential says it believes it may take GM longer to mitigate shareholder value than the market expects. GM was given a price target of $33, while the brokerage left its earnings and revenue estimates unchanged. However, Prudential believes analyst expectations for 2006 are still too low. Shares of GM were up 3 cents, or 0.1%, to finish at $31.01.

Smith Barney cut

Alcoa's

(AA) - Get Report

earnings estimate and stock price target due to the failure of its "hyper-bull" aluminum price forecast. The brokerage cut its 2005 earnings estimate to $2.01 a share from $2.30 and the stock price target to $35 from $42. Smith Barney did, however, maintain its buy rating on Alcoa. Shares lost 10 cents, or 0.4%, to $26.60.

Hot Topic

(HOTT)

rose 8.4%, while

Pacific Sunwear

(PSUN)

fell 2.4% after brokerage J.P. Morgan gave two different views on the retailers. Hot Topic was upgraded to neutral from underweight, while the brokerage downgraded Pacific Sunwear to underwight from neutral, saying its outlook wasn't as positive. Hot Topic was up $1.62 to $20.99, while Pacific Sunwear was off 52 cents to close at $21.21.

Overseas markets were lower with London's FTSE 100 unchanged at 4884 and Germany's Xetra DAX falling 0.3% to 4262. In Asia, Japan's Nikkei fell 0.9% overnight to 10,947.

Investors will see a couple of key economic reports Tuesday, including the producer price index for April, housing starts for April as well as industrial production levels. In addition to Home Depot, major earnings reports Tuesday will include

J.C. Penney

(JCP) - Get Report

and

Hewlett-Packard

(HPQ) - Get Report

.

"I'm hoping the PPI comes in close to or below the estimates," says Pavlik. "I frankly wouldn't be too surprised if it's slightly higher especially since we've been seeing some inflationary signs. Looking into the PPI report, we could see oil trending slightly lower, and we might be able to get an indication if manufacturers are still able to pass along their price increases to their customers. This is key because that means the deflationary scare continues to pass."

Pavlik is also looking at housing starts data for April to provide the market with some positive action. "We have housing starts, which undoubtedly continue to be strong because interest rates continue to be at very low levels."

To view Aaron Task's video take on today's market, click here.