NEW YORK (CNN/Money) - Technology stocks rallied Monday in unusually heavy trading fueled by rumors of a possible merger between rival handheld device makers Palm and Handspring.
Some analysts and money managers believe a merger between Palm (PALM: up $0.44 to $3.87, Research, Estimates) and Handspring (HAND: up $1.41 to $5.41, Research, Estimates) might be a good idea in the wake of the recent resignation of Palm CEO Carl Yankowski, the Wall Street Journal reported Monday.
PC maker Dell Computer (DELL: up $0.32 to $26.92, Research, Estimates) launched a more powerful computer Monday aimed at small and medium-sized businesses.
The $1,400 computer servers will have a Pentium 3 chip made by Intel (INTC: up $0.36 to $30.99, Research, Estimates).
The Goldman Sachs hardware index gained 2.17 percent, reaching 259.32 points.
SCM Microsystems (SCMM: up $3.48 to $11.75, Research, Estimates), maker of smart-card-based security hardware and software, announced a deal with a unit of Northrup-Grumman to supply smart-card readers to the U.S. Army.
No financial terms of the deal were provided, but the company said the Army will use the smart cards as a single badge for multiple security measures, such as physical identification and building access.
About 50,000 card readers have already been delivered as part of the initial deployment of the program, company officials said.
Shares of U.S. e-business software maker PeopleSoft Inc. (PSFT: up $3.69 to $36.05, Research, Estimates) rose after company officials said a robust order pipeline has put it on target to meet its fourth-quarter earnings forecast despite the global economic slowdown.
The Goldman Sachs software index gained 3.61 percent to close at 176.66 points.
Chipmaker TranSwitch (TXCC: up $0.17 to $5.08, Research, Estimates) announced Friday that it plans to lay off 10 percent of its workforce, or 46 people, in an effort to cut operating expenses in the face of ongoing weakness in telecom markets. The company reaffirmed its guidance for the fourth quarter.
Analysts from Deutsche Banc said Monday they maintain the view that fundamentals will likely remain weak for the chip-equipment sector.
The firm said several companies are at risk of missing order guidance for the current quarter and that downward "surprises" to 2002 capital expenditure plans will likely trigger more downward estimate revisions through the first half of next year.
The bank said longer-term investors, looking out at least nine months, should focus on companies that are well-positioned to be winners in the next cycle, such as Novellus (NVLS: down $1.29 to $37.60, Research, Estimates) and Brooks Automation (BRKS: up $0.49 to $36.80, Research, Estimates).
Merrill Lynch's Joe Osha gave graphics chipmaker Nvidia (NVDA: down $1.15 to $51.34, Research, Estimates) an intermediate-term "accumulate" rating and a long-term "buy" rating.
He said the company has become a dominant player in the graphics industry during the past two years and has achieved a size that would make it tough to replace. Osha said Nvidia's execution has been excellent and the company has not missed a beat in the past two years.
Nvidia supplies the graphics processors for Microsoft's recently launched Xbox gaming system.
The Philadelphia Stock Exchange's semiconductor index fell 0.97 percent to close at 524.76 points.
Merrill Lynch analyst Justin Bauldauf said now is the "sweet spot" of the video game industry earnings cycle. He gave intermediate-term "accumulate ratings" on Electronic Arts (ERTS: up $2.67 to $56.79, Research, Estimates), Activision (ATVI: up $1.64 to $36.15, Research, Estimates) and THQ (THQI: up $1.52 to $54.20, Research, Estimates) Monday.
Merrill said video game software sales are projected to grow by 25 percent in 2002 and 23 percent in 2003 from single-digit growth this year.
Bauldauf said growth should be driven by sales of new consoles from the Microsoft (MSFT: up $0.79 to $66.54, Research, Estimates) Xbox and Nintendo GameCube, and the continued strength of Sony's PlayStation2 sales.
He added that near-term risks include the fact that multiples typically expand ahead of console launches and then compress, and that demand from "casual gamers" could be weak compared with "hard-core gamers" given the depressed environment.
Sweden-based Ericsson (ERICY: up $0.09 to $5.48, Research, Estimates), the third-largest maker of mobile phones and the largest maker of mobile phone equipment, lost market share in the third quarter, down to 8 percent from 9.7 percent. Finland-based Nokia (NOK: down $0.37 to $24.62, Research, Estimates) reported 33.4 percent of market share, up from 30.6 percent a year ago.
The Internet and networking sectors also pushed Nasdaq numbers higher.
The Goldman Sachs Internet index gained 4.40 percent to close at 104.27 points.
The American Stock Exchange's networking index rose 3.55 to reach 356.27 points. 
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