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Market Update: Dow, Nasdaq Up by Double Digits

<LI>Defensives under heavy pressure today.</LI><LI>Shorts covering their positions were big part of yesterday's rally.</LI><LI>Inktomi slammed after post-close warning.</LI>

The day after the surprise interest-rate cut and blowout rally, stocks were double-digitally positive. The tech-heavy

Nasdaq, the broader

S&P 500 and the blue-chip

Dow were zig-zagging all morning, though. The Nasdaq was lately up 25 to 2641.8 while the Dow was up 52.2 to 10,997.

The

Federal Reserve dropped the

federal funds rate to 6% from 6.5% yesterday, sparking 300-plus point gains in the blue-chip Dow and the Nasdaq. The Nasdaq rose 14.17% yesterday -- its biggest percentage gain ever.

While lower interest rates are great for the economy, the positive effects probably won't trickle into earnings for a while. And what is expected to be a pretty nasty earnings season is coming up just next week.

One thing is for sure: Financial stocks continued to surge, as did computermakers. Financial companies tend to benefit from interest-rate cuts because consumers and companies can afford to borrow more. But some say investor optimism over financials might be

premature. Cyclical stocks like hardwaremakers, a la

IBM

(IBM) - Get International Business Machines (IBM) Report

and

Compaq

(CPQ)

, are also well positioned to benefit, as they tend to be in lockstep with the economy. But even that sector probably won't see the benefits for at least a couple of quarters.

Other cyclical tech stocks, like the semiconductors, were also rising today. The

Philadelphia Stock Exchange Computer Box Maker Index

was up 4%, while the

Philadelphia Stock Exchange Semiconductor Index

was up 1.7%.

Noncyclical safety stocks -- like the drugs, tobacco and utility stocks -- where investors had been seeking shelter from rocky markets, were under the heaviest selling pressure today. Tobacco goliath

Philip Morris

(MO) - Get Altria Group Inc Report

was down 3.6% to $40.75 and drug giant

Merck

(MRK) - Get Merck & Co., Inc. (MRK) Report

was falling 5.1% to $84.69.

While the interest-rate cut can't wash the gray out of the fourth quarter earnings season, it is an important step in forming a market bottom, market pros say. Many investors need a to see a bottom -- or a market low -- hold before they're comfortable putting new money into the market. To be sure, there is plenty of available cash after so much selling in the past few months.

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There is talk that the unexpected cut was a move to

shore up investor sentiment ahead of what is expected to be a very negative

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jobs report tomorrow -- in order to prevent the market from going into free fall. That data will show what happened to employment in December as the economy was slowing.

The interest-rate cut was extraordinary because the Fed rarely makes such changes between official meetings. The Fed next meets on Jan 30 and 31. The federal funds rate is the rate banks charge each other for short-term loans.

If the Fed did move for that reason, the economy is in even worse shape than some had thought. And that may be what is scaring investors. Already much of Wall Street was predicting a recession, defined as two consecutive quarters of economic contraction.

The last jobs report -- one of the market's most watched economic indicators -- already showed that job growth was slowing far more sharply than expected. Nonfarm payrolls added 94,000 new jobs in November, compared to forecasts from economists for 140,000 new jobs. The number of jobs created in October was 77,000 -- 137,000 had been predicted -- putting the 12-month average pace of job growth at 176,000, its lowest measure since April 1996. Economists have been forecasting new nonfarm payrolls to total 102,000 for December. Tomorrow will tell the real number.

Here's a sneak peak. This morning's release of the weekly jobless claims showed a record not seen since July 1998. Jobless claims for the week ended Dec 30. equaled 375,000.

Another factor that forced up stocks yesterday, however, was "short-covering." Investors who

shorted -- those who sold borrowed stocks with the intention of buying them back later at a lower price -- would have profited from continued losses in the market. Surprised by the interest-rate cut and the spectacular rally that followed, they rushed to cover their positions.

Elsewhere in the market,

Inktomi

(INKT)

went the way of other companies that have warned recently on missing earnings estimates -- down. The developer of Internet infrastructure software was falling 19.6% after it said last night that first-quarter revenue and earnings would fall below prior expectations. The company

cited a slowdown in infrastructure spending, a trend that has hit other technology companies whose sales growth has slowed as fewer orders are placed by their customers.

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Sector Watch

Energy stocks continued to sink in the wake of yesterday's rate cut, because the move signals that energy prices, in the Fed's eyes, are no longer a major threat to inflation. The

American Stock Exchange Natural Gas Index

was off 4% and the

American Stock Exchange Oil & Gas Index

was down 1.5%. Both fell sharply yesterday as most other sectors soared. Rising energy prices have been one of the principal pillars driving earnings growth and climbing stock values in this sector in recent months.

Retailers were lower after reporting their most recent

same-store sales numbers. The

S&P Retail Index

was down 1.3%. Apparel retailers generally disappointed, including

Gap

(GPS) - Get Gap, Inc. (GPS) Report

, which was edging 0.2% higher. Much of the disappointing news had already been priced into retailers due to a weak holiday season.

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Bonds/Economy

Treasury prices were rising again today after selling off furiously yesterday after the Fed's interest-rate cut. The benchmark 10-year

Treasury note was lately up 24/32 at 105 7/32, yielding 5.057%.

TheStreet.com

took a look at the burst of selling in the

bond market yesterday.

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