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Stocks Rally for Third Day

The Dow jumps 133 points, while the Nasdaq adds 27.

Updated from 4:05 p.m. EDT

Stocks soared Wednesday as benign inflation data and plunging oil had buyers in control for the third consecutive session. Metal stocks rallied, while tech benefited from optimism about

Hewlett-Packard's

(HPQ) - Get Report

turnaround and bullish research from a previously skeptical Merrill Lynch analyst.

The

Dow Jones Industrial Average

rose 132.57 points, or 1.28%, to 10,464.45, closing above the 10,400 level for the first time since April 13. The

S&P 500

gained 11.76 points, or 1%, to 1185.56. The

Nasdaq Composite

added 26.5 points, or 1.32%, to 2030.65.

So far, the Dow has added 324 points for the week, the S&P 500 is up 31 points, and the Nasdaq has gained almost 54 points.

About 2.25 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 1.96 billon shares, with advancers outpacing decliners by almost 3 to 1.

"This was a good, broad-gaining day, with the key being increased volume, which we haven't seen this week," said Al Goldman, chief market strategist with A.G. Edwards. "There is good upside momentum, although we may need time to refresh in the coming days. Ultimately, the market will keep meandering up and out of the trading range we've been in. There's a sound, fundamental structure in place."

In other markets, the 10-year Treasury was up 11/32 in price to yield 4.07%, while the dollar fell against the yen and euro after the core CPI data were unexpectedly unchanged last month.

Crude futures plunged after the Energy Department's weekly report on U.S. fuel inventories showed another big increase. Oil traded down $1.70 to close at $47.25 a barrel on the Nymex. Crude inventories increased 4.2 million barrels, about four times the expected rate and the 13th gain in 14 weeks.

Energy was the only weak sector Wednesday. Stronger areas include materials, computers, software, biotech, utilities and financials.

Stocks and bonds rose after a government report showed tame inflation on the consumer level. The Labor Department said the consumer price index for April rose 0.5%, more than expected. But the core CPI, which excludes food and energy, was unchanged for the month.

"The extent of the rally was due to the CPI number, which fed into pre-existing momentum," says John Canavan, market analyst with Stone & McCarthy Research Associates. "The market rallied following yesterday's bearish PPI numbers as well. The pre-existing mentality is to buy on any dips."

Wednesday's CPI presented a conundrum for the

Federal Reserve

, which has publicly worried about the impact of rising energy prices on consumers. The report showed the cost of fuel rising at its fastest rate since 2003, but failing to bleed into the price of other products.

"I don't think it really tells us anything right now," says Paul Mendelsohn, chief investment strategist with Windham Financial Services. "The Fed is still on course to raise interest rates. If the numbers maintain in the May report leading up the Fed meeting, it may lead them to not increase as many times this year.

"On the headline number, we're still running at a higher rate. They have to do something about the energy prices, especially heading into the summer, where gas prices will be a major factor," Mendelsohn says.

Also lending support to the market Wednesday was a research call from Merrill Lynch touting the technology sector an intermediate-term trade as corporate IT spending strengthens. Merrill's Steve Milunovich raised his opinion of the sector to market weight from underweight.

Stocks that lead the Nasdaq charge included

JDS Uniphase

(JDSU)

, which gained 2.8%;

Sanmina

(SANM) - Get Report

, up 5.2%;

Research In Motion

(RIMM)

, higher by 4.2%; and

Amazon

(AMZN) - Get Report

, finishing up 1.7%.

"Market fundamentals have turned more positive over the past 24 hours with market leadership developing in the technology, retail and financial sectors, coupled with a bounce in the energy and commodity area," adds Mendelsohn. "We should be running up to resistance, though, giving us a bunch of hurdles in this trading area."

"Yesterday saw a flip-flop in leadership as basic materials, utilities and energy led the pack," says Ken Tower, chief market strategist with CyberTrader. "The moves in energy and basic materials are likely to be dead-cat bounces and the more promising leadership areas are tech, health care, utilities, finance."

Hewlett-Packard said second-quarter earnings rose 9% from a year ago to $966 million, or 33 cents a share, while adjusted earnings of 37 cents a share beat estimates by a penny. Revenue rose 7% from last year to $21.6 billion, about $200 million better than expected.

The company's new CEO, Mark Hurd, said in a conference call that Hewlett-Packard is in the midst of a restructuring that will see it spend $100 million in the third quarter to reduce its 150,000-person workforce. One result will be earnings that are 1 cent to 3 cents below existing per-share estimates. H-P rose $1, or 4.6%, to $22.55.

Besides Hewlett-Packard, the

Dow's

leaders were

Alcoa

(AA) - Get Report

,

DuPont

(DD) - Get Report

and

Boeing

(BA) - Get Report

.

Shares of

Applied Materials

(AMAT) - Get Report

lost 0.6% after the chip-equipment company reported a solid first quarter but reduced its current-quarter outlook.

Second-quarter earnings fell 18% from a year ago to $305 million, or 18 cents a share, on an 8% decline in sales to $1.86 billion. Both beat estimates. For the third quarter, however, Applied Materials sees earnings of 12 cents to 14 cents a share, below the 17-cent Thomson First Call consensus. The stock, which was down as much as 4% earlier, closed lower by 10 cents at $15.94.

TheStreet Recommends

Google

(GOOG) - Get Report

was making history thanks to the boost in the tech sector. Shares gained $6.03, or 2.6%, to $239.16, a new closing high for the stock.

Clothing retailer

Abercrombie & Fitch

(ANF) - Get Report

posted first-quarter earnings of $40.4 million, or 45 cents a share, up from $29.3 million, or 30 cents a share, a year ago. Revenue for the quarter was $546.8 million. Analysts expected profits of 42 cents on revenue of $535.5 million, according to Thomson First Call.

Banc of America downgraded Abercrombie & Fitch to neutral from buy on Wednesday. The stock fell $2.26, or 3.8%, to $56.73.

Yum Brands

(YUM) - Get Report

said same-store sales at its U.S. restaurants rose 4% in the latest month. The company was expected to post an increase between 2% and 3%. Yum Brands said that sales rose 1% at Pizza Hut, 4% at Taco Bell, and 7% at KFC in the four weeks ended May 14. Shares added $3.32, or 6.9%, to $51.46.

The auto sector rallied Wednesday, led by a 6.5% gain in

Ford

(F) - Get Report

. Shares of

General Motors

(GM) - Get Report

were up 2.4%, and

DaimlerChrysler

(DCX)

gained 2.7%.

Toyota Motor

(TM) - Get Report

, which recalled about 790,000 trucks and sport utility vehicles due to problems with the front suspension, was just 7 cents, or 0.1%, higher at $72.53.

Metals USA

(MUSA) - Get Report

agreed to be acquired by private investment first Apollo Management, catapulting other stocks in the steel and metals industry higher Wednesday. Metals USA shareholders will receive $22 in cash for each share they own. The transaction will be financed through a combination of equity contributed by Apollo and debt financing. Shares of Metals USA rose $7.22, or 52%, to $21.11.

Too

(TOO) - Get Report

earned 21 cents a share on sales of $164.4 million. Analysts were expecting earnings of 20 cents a share on sales of $172.6 million. A year ago, the company posted restated earnings of 14 cents a share on sales of $154.1 million. Too also said that second-quarter earnings would be 5 cents a share, unchanged from a year ago. Susquehanna Financial Group downgraded the shares to neutral. Shares were off $2.50, or 11.3%, to finish at $19.55.

Shares of

palmOne

(PLMO)

gained 1.8% Wednesday after introducing LifeDrive, a mobile computer device featuring a four-gigabyte hard drive, file management and wireless capabilities. The company said the device, which is smaller than a matchbook, can hold 1,200 office documents. Shares added 46 cents to $25.69.

H.J. Heinz

(HNZ)

on Wednesday increased its quarterly common stock dividend 5.3% to 30 cents. The dividend will be payable on July 10 to shareholders of record as of June 24. Heinz rose 46 cents, or 1.2%, to $37.64.

In ratings news, J.P. Morgan upgraded

Delta Air Lines

(DAL) - Get Report

to overweight from neutral, citing valuation. The brokerage says that while Delta may eventually have to declare bankruptcy, it doubts it will happen this year. Shares gained 29 cents, or 9.6%, to $3.30.

Stocks got a lift Tuesday when the Treasury Department issued a much-anticipated report accusing China of keeping its currency artificially low. U.S. businesses have sought sanctions against the world's most populous country, which they argue derives export advantages from its currency policy.

The report, which stopped short of labeling China a currency manipulator, helped soothe fears sparked earlier by a high read on wholesale inflation.

Overseas markets were mostly higher, with London's FTSE 100 recently adding 1% to 4949 and Germany's Xetra DAX adding 1.7% to 4324. In Asia, Japan's Nikkei rose 0.1% overnight to 10,835, while Hong Kong's Hang Seng lost 0.3% to 13,627.

Earnings reports expected after the closing bell Wednesday include

Brocade Communications

(BRCD)

,

Hot Topic

(HOTT)

,

Intuit

(INTU) - Get Report

,

Foot Locker

(FL) - Get Report

, and

BEA Systems

.

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

.