The oil market, which has doled out painful medicine to stocks this month, got a taste of its own on Monday.

With oil in retreat, stocks gained sharply, especially retailers and technology companies. Investors who bought are likely to be rewarded again on Tuesday, after

IBM

(IBM) - Get Report

reported higher-than-expected profits and forecast strong demand for its products and services.

The

Nasdaq Composite

led the way, gaining 1.3% to 1936.52 while the

S&P 500

moved up 0.5% to 1114.02. The

Dow Jones Industrial Average

lagged with a gain of 0.2% to close at 9956.32. The index was held back by

3M

(MMM) - Get Report

, which missed third-quarter profit estimates and lost 2.4% to $76.10.

If oil stays out of the way on Tuesday, the Nasdaq could have further to fly, thanks to IBM. The world's biggest computer company said revenue increased 9% and net income increased 12% excluding a lawsuit settlement.

CEO Sam Palmisano said IBM is seeing "robust growth" in its key markets, including more than 30% growth in the emerging markets of Brazil, China, India and Russia. IBM gained $1.07, or 1.3%, to $85.92 before the earnings came out and recently tacked on another $1 in after-hours trading.

During the regular session,

Microsoft

(MSFT) - Get Report

rose 1.5%,

Dell

(DELL) - Get Report

added 1.5%, and

Cisco

(CSCO) - Get Report

was up 0.9%. Semiconductors gained less, up 0.8%, ahead of results from

Texas Instruments

(TXN) - Get Report

. The

company's report provided some fodder for bulls, as revenue surged late in the fourth quarter, but inventory buildup remained a problem.

Retailers, also buffeted by fears that oil would sap consumer demand, rose too.

Circuit City

(CC) - Get Report

rose 3.2%,

Gap

(GPS) - Get Report

added 3.5%, and

Rite Aid

(RAD) - Get Report

increased 3.6%.

Oil Feels the Heat

Oil prices have risen for most of the last month, and this has killed economically sensitive stocks such as retailers, which suffer when higher energy prices curb consumer and business spending. Manufacturers and others that have seen profit margins squeezed by higher gas prices are also off, as are basic materials producers. Just on Monday, 3M,

Delphi

(DPH)

and

American Standard

(ASD)

warned that they were getting squeezed.

At some point, that creates a disconnect between the markets, as slower growth also will eventually reduce demand for oil as well. The market shrugged off last week's revised forecast from the International Energy Agency that slower growth would result in less need for oil in 2005. And early on Monday, crude futures climbed to another all-time record of $55.33. But by the close, oil was back down to $53.67, a 2.3% fall from Friday's price.

J.P. Morgan Chase tried to drive the realization home, slashing growth forecasts for the U.S., Japan and Europe while increasing its inflation prediction for the U.S.

"Persistently high oil prices are likely to extend the global soft patch in demand spilling in to early 2005," the firm's market strategists wrote. In the U.S., that meant the economy would expand 3.1%, down from a previous forecast of 3.5% in the fourth quarter, and 3% in the first quarter of 2005, down from 4%.

Economy.com's Haseeb Ahmed agreed, predicting that the current high level of oil prices could squeeze the economy, lowering growth next year to as little as 2.5%. "Even if prices simply stayed at current levels for several months, the risks of particularly adverse outcomes would rise appreciably," he wrote Monday.

Steely Bonds

The market's changing assessment of the economy did little for bonds, which were basically unchanged Monday. The Treasury's 10-year note finished with a yield of 4.05%, the same as Friday.

Bonds were down earlier but erased losses after

Federal Reserve

Governor Mark Olson hinted that the Fed might pause its interest rate hike campaign due to slow growth. "Essentially the question is, is the economy continuing to improve to the point that we can continue to remove the accommodation, and that's the question that we will be addressing," he told reporters after a speech in Washington.

Although bonds rallied on the comment, it's more of the same from the Fed. As Greenspan indicated on Friday, things are going to have to get worse -- oil has to go "materially higher" -- before he'll be worried about the economy.

J.P. Morgan's report agreed, with its headline: "Oil to weaken growth but not pause the Fed."

Another not-so-good bit of news for bonds came from the Treasury Department's monthly report on investment flows into and out of the country. Foreign purchases of U.S. debt dropped to a net $14.6 billion in August, down from $22.4 billion in July. As

RealMoney.com

contributor Steve Smith noted, the Treasury plans to sell $105 billion of new issues over the next six weeks, a task that could get expensive if foreign buyers don't show up in the same numbers as last year, when they accounted for 40% of all purchases.

American Standard's earnings also provided seeds of inflation fears that J.P. Morgan and others are picking up on. Though the plumbing-supply company's third-quarter results were hit by higher prices for steel and other materials, price increases are sticking, CEO Fred Poses said.

"We've realized price increases, mainly in our air conditioning business, that have partially offset commodity cost escalations," he said in the company's earnings release. "With recently announced industry pricing actions, we expect more price increases in place by year-end."

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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