Crude was neither rude nor socially unacceptable Tuesday.

The markets cheered the 2.74% drop in the oil price, sending the major averages back up toward May's highs. The oil plunge meant all things to all people Tuesday -- a Goldilocks economy, no inflation, no more rate hikes and a strong consumer. The earnings outlook also cooperated as

Goldman Sachs

(GS) - Get Report

and

Best Buy

(BBY) - Get Report

beat expectations.

The

Dow Jones Industrial Average

gained 0.89% Friday, to close at 11,498.09, down only 1.245 from its May high of 11,642.65. The

S&P 500

gained 1.04% to close at 1313.12, only 0.9% from its May high of 1325.14.

The

Nasdaq Composite

hit a three-month high Tuesday, gaining 2% to 2215.82, as buyers made aggressive bets on momentum favorites, such as

Rackable Systems

(RACK)

,

Comverse Technology

(CMVT)

and

Marvell Technology

(MRVL) - Get Report

.

Chip stocks also aided the Comp, which remains 5.5% off its May highs, with

Applied Materials

(AMAT) - Get Report

up 6% after an upgrade and

Broadcom

(BRCM)

jumped 7% in the tech rush. The Philadelphia Stock Exchange Semiconductor Index climbed 3.8%, as traders brushed off

Texas Instruments'

(TXN) - Get Report

middling midquarter update late Monday.

"It's all crude," says Michael Driscoll, head of listed trading at Bear Stearns.

Atop crude's decline, the news of the day supported the bullish case. Goldman and Best Buy reported strong earnings that beat Wall Street expectations. Goldman's shares gained 4.83%, while Best Buy rose 9.2%.

But oil's decline was the main catalyst. The price of oil fell 2.78% to close at $63.81 per barrel, its lowest level in five months.

"Getting speculators out of crude oil and energy is good for the economy, for consumers, for inflation and for the stock market," says Gail Dudack, chief investment strategist and partner at Dudack Research Group.

Indeed, the decline in oil was good for the companies who consume oil -- the transports, for example -- as much as it was good for the companies that sell products to consumers who need gas and heating oil.

FedEx

(FDX) - Get Report

and

UPS

(UPS) - Get Report

were up 3.10% and 2.27%, respectively, while consumer discretionary names such as

General Motors

(GM) - Get Report

and

Home Depot

(HD) - Get Report

gained 4.37% and 4.56%, respectively.

Urban Outfitters

(URBN) - Get Report

soared 8.7% following positive comments from analysts at Goldman and Bank of America.

The Dow Jones Transportation Average gained 3.33% Tuesday, closing at 4369.85, its highest level since Aug. 18. The S&P Retail Index climbed 3.1%.

Investors' fears were assuaged about the brokers contributing to a seasonally weak September when Goldman reported a smaller-than-expected decline in its third-quarter profits.

Lehman Brothers

(LEH)

reports Wednesday, but now has a higher fence to jump, as its shares already climbed 4.17% in concert with Goldman's. The AMEX Broker-Dealer Index gained 3.2%.

Given that Goldman's proprietary trading desk is a virtual proxy for the hedge fund community, its 7% year-over-year decline in trading and principal investment revenue was telling, and its 32% drop in such revenues on a sequential basis could be even more telling. If hedge funds generally had a bad quarter, no wonder they are so eager to believe in a soft landing and a rosy fourth quarter for stocks.

Indeed, the Commerce Department's report that the July trade deficit climbed to a record $68 billion from $64.8 billion in June could easily have been seen as negative news if it weren't for the bullish tone in the market Tuesday. Instead, traders interpreted the data as signs of continued strong demand for imported goods.

Even the fed funds futures market is starting to take the notion of recession off of the table. Investors took a January rate cut off the table, according to Miller Tabak. Only two weeks ago, the fed funds futures market priced in a 24% chance of a

Fed

rate cut by Jan. 31. But removing the chances of a cut doesn't mean investors believe a hike is likely. Odds of a hike stand at only 16% for 5.5% by year-end.

Tuesday's rally comes amid evidence sentiment among fund managers also rebounded over the past month, according to Merrill Lynch.

The Merrill Lynch Global Fund Manager Survey for August, which got so much attention last month for being ultra-bearish, reflected how uplifting it was for the Fed to end the rate-hike parade. Oil's decline was a mood-enhancer as well. In August, only 7% of fund managers thought a recession is likely, compared with 12% in July. Only 3% expect core inflation to be higher one year from now, compared with 50% of fund managers three months ago.

Perhaps most importantly, and most reflected in the market, fund managers were starting to nibble at risk again. According to the report, fund managers are putting their cash to work again, with average cash balances down to 4% from 4.4% last month. Likewise, the percentage of fund managers overweight cash fell to 20% from 30% in August.

Of course, one really bad piece of data -- Friday's CPI report, perhaps, or a kicker in the housing market -- could push buyers off of the bullish sweet spot at any moment.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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