Wall St. rallies again on rate cut talk

By Parija Bhatnagar
CNN/Money Staff Writer

NEW YORK (CNN/Money) -- U.S. investors put on a display of bravado Tuesday, snapping up stocks in many industries, even as some market veterans voiced skepticism as to whether the rally could live on.

Beaten down stock prices, as well as strength in the dollar and heightened expectations for a Federal Reserve interest-rate cut, lent support to the market.

The Dow Jones industrial average jumped 230.46 to 8,274.09, a gain of 2.9 percent that was well off its high for the session, but still partly reversed a string of three triple-digit losses. The Nasdaq composite rose 53.44 to close at 1,259.45, breaking a four-session losing streak.

The Standard & Poor's 500 index rose 24.97 to end the day at 859.57.

"I wasn't surprised investors began pulling back at the close. Even though the run-up was huge, there wasn't a lot of volume there, " said Charles Payne, CEO and chief market analyst wtih Wall Street Strategies.

"When there's a sustained rally across the board, we see a leadership stock that investors rally around to create a coattail for the rest of the market. I didn't see that happen.

Cisco boost

"We're in a volatile period where triple-digit gains on the Dow become the norm for a while until we get some conviction about where the economy is going," Payne added.

Currency analysts said the dollar benefited as some investors started to turn back to the United States after the market's recent steep losses.

"Talk of repatriation started in mid-July, particularly in Asia," said Sean Callow, currency analyst with IDEAglobal.com.

"Asian equities have performed poorly in recent days and therefore money is leaving Asia and returning to the U.S. Investors are looking to take profits to cover the losses elsewhere."

The much-anticipated quarterly report from Cisco Systems (CSCO: up $0.71 to $12.07) came in better-than-expected after the close of trading. Techonology stocks in general enjoyed moves to the upside as did nearly all the 30 blue chips in the Dow.

"The only thing that was positive today was that there was nothing negative, especially no lousy economic reports that we've had over the last four trading days. The summer doldrums have not appeared so far," said Larry Wachtel, market analyst with Prudential Financial.

Rate cut tip

But that could change toward the end of the week with the July producer price index on tap for Thursday followed by reports on second-quarter worker productivity and consumer confidence on Friday.

A Standard & Poor's rating downgrade of Lucent Technologies (LU: up $0.05 to $1.60) "negative" from "stable," citing the increasingly uncertain prospect for the telecom equipment maker to return to profitability, appeared to be waved aside as investor optimism spread.

Lehman Bros. was the latest to jump on the bandwagon of opinion predicting the Federal Reserve will cut interest rates this year, seeing a three-quarters percentage point move before 2003.

"We have seen enough economic and financial pain and now see a 60 percent chance that the Fed will cut the funds rate in the next several months. Our main scenario is 25 basis point cuts (a quarter-percentage point) at the September, November and December meetings, pushing the funds rate down to 1 percent," Lehman said in a midday note.

Goldman Sachs last week said it anticipates the Fed to cut rates by three-quarters of a percentage point by year-end. The Fed, the nation's central bank, cut short-term rates 11 times in 2001 in a bid to stabilize a sagging economy.

AOL names new chief

Elsewhere, Internet and media conglomerate AOL Time Warner (AOL: down $0.05 to $9.90) named former USA Interactive executive Jonathan Miller as chairman and CEO of its America Online division.

AOL Time Warner, the parent company of CNN/Money, has faced a challenging business environment for its AOL unit amid a sustained downturn in advertising, and more recently the company became the subject of federal probes into its accounting practices.

Prudential's Wachtel pointed out that another dynamic at work in the market was asset allocation switching to stocks from bonds after short-term yields dropped dramatically to levels below return on equities.

"Suddenly we had a fixed-income area yielding less than stocks. The bonds have been too overweighted and equities have been too underweighted. That's why we have this inside baseball activity like asset allocation going on," Wachtel said.