NEW YORK (CNN/Money) -
Stocks staged their second powerful rally in the last four sessions Monday as more and more investors were betting that the tidal wave of selling that engulfed Wall Street may be starting to recede.
The Dow Jones industrial average soared 447.49 to 8,711.88, its third-biggest point gain ever. The world's most widely watched stock average has now jumped about 10.6 percent over the last week after Monday's gains and last Wednesday's 489-point rally.
"Investors are just realizing that the market looks pretty cheap today," John Forelli, portfolio manager for Independence Investment LLC in Boston, told the Associated Press.
The Nasdaq composite gained 73.13, or 5.8 percent, to 1,335.25 and the Standard & Poor's 500 index added 46.12, or 5.4 percent, to 898.96.
"The rally had a lot of legs to it. It felt powerful. It was broad-based, across the board and it held through the close," Ted Weisberg, a trader at Seaport Securities, told CNNfn's Street Sweep.
"But I suspect there was a lot of short-covering [and that] we're not out of the woods yet," he said, referring to investors who "sold short," or bet stocks were going to decline further, only to be forced to buy to cover those bets.
"For the moment, we still have to view this as a bear market rally -- sharp with lots of volume. I think we'll probably pull back from this strength and we'll have to see if we can hold it from there and then go higher," Weisberg said.
Like last week's rally, several factors contributed to Monday's strength. A rebound in the dollar was a sign that international investors are starting to look more favorably on U.S. assets. Financial stocks, recently battered, continued their rebound, and there was no major piece of bad news in the corporate scandals.
Even news that Qwest, the big telephone company, would have to restate earnings was not enough to spook investors.
Chip-equipment maker KLA-Tencor (KLAC: up $1.62 to $38.91, Research, Estimates), energy company Dynegy (DYN: up $0.52 to $1.20, Research, Estimates) and retailer Coach (COH: up $2.82 to $24.72, Research, Estimates) are among the companies due to report results Tuesday. The Conference Board's reading on July Consumer Confidence is the main economic report due Tuesday. It's expected to show a decline to 101.5 from a reading of 106.4 in the previous month.
Amid a broad rally on the Dow Monday, financials stood out. Controversial companies J.P. Morgan Chase (JPM: up $2.85 to $25.10, Research, Estimates) and Citigroup (C: up $2.57 to $33.31, Research, Estimates) continued to rally on strong denials of any financial wrongdoing in the collapse of Enron, a charge that had hurt shares in the previous week.
Other big caps also joined the rally, extending the previous session's gains, with Microsoft (MSFT: up $2.90 to $48.25, Research, Estimates) and IBM (IBM: up $4.78 to $71.18, Research, Estimates) charging ahead.
On the Nasdaq, semiconductors got a boost from a positive Merrill Lynch note, in which analyst Joe Osha said the firm has revised its valuation outlook on the sector and now expects a modest recovery. Intel (INTC: up $1.08 to $18.89, Research, Estimates), Applied Materials (AMAT: up $0.78 to $15.10, Research, Estimates), Novellus Systems (NVLS: up $3.28 to $27.88, Research, Estimates) and KLA-Tencor were among the stocks trading higher.
"It's a much-needed rally off of extremely oversold conditions and we're getting a really strong bounce right now," said Brian Finnerty, managing director at Melhado Flynn & Associates. "You need to hold these gains and you need to get a few more days of follow-through. I believe we will."
Another key factor in the advance was the recovery of the dollar, which rose to ¥119.81. Weakness in the dollar has been a contributing factor in the market's recent decline. It has been as low as ¥115 this month. The euro fell to 97.92 U.S. cents early Monday after rising as high as $1.02 earlier this month.
"When the dollar is falling, there is a fear that international investors are pulling out, and this can impact stock prices and company profits both in the U.S. and abroad," said Sean Callow, a currency strategist at IDEAglobal.com. "So when the dollar rallies, it is intertwined with equity markets."
"The fact that the dollar is rallying strongly at the same time that the equity markets are rallying is no coincidence, as a strong dollar brings money into U.S. stocks and vice versa," Callow said. "But it's also indicative of sentiment. Today, the dollar surge you're seeing is a vote of confidence in the U.S. economy."
AOL shares recover
Shares of media company AOL Time Warner (AOL: up $0.68 to $11.58, Research, Estimates) bounced after declining sharply last week following the disclosure of a Securities and Exchange Commission probe of the company's accounting. On Monday, a New York Times report said that AT&T (T: up $0.60 to $9.74, Research, Estimates) is seeking at least $1 billion from the parent of CNN/Money as a condition for accepting AOL's plan for dissolving Time Warner Entertainment, a joint venture.
On a positive note, J.P. Morgan said Monday that AOL's liquidity looks to be in good shape. In addition, the company's New Line Cinema unit's "Austin Powers in Goldmember" took in $71.5 million, a record July opening for a film.
But reminding investors of the accounting scandals that have plagued markets for months, telecom company Qwest Communications (Q: down $0.01 to $1.49, Research, Estimates) said it will restate financial reports for 1999 to 2001 due to more than $1 billion worth of sales improperly recorded. The company already is under investigation by the Securities and Exchange Commission and the Department of Justice. CIBC World Markets said the company could possibly declare bankruptcy and that this would be a positive for the sector as a whole.
However, some analysts said the fact that this latest scandal hurt only Qwest's shares, rather than a broader range of issues, was a positive for market psychology.
According to a number of market watchers, there was at least one other interesting psychological factor affecting trade Monday: the safe rescue this weekend of nine miners trapped in a collapsed Pennsylvania coal mine.
"This has been a psychologically driven market and this rescue takes people out of themselves," said Douglas Altabef, managing director at Matrix Asset Advisors. "It's not something that will sustain us, but what will sustain us is the strong economy, the improved earnings and the fact that people are starting to take a more balanced look at corporate scandals. We're seeing that with the reaction to Qwest."
"It's not that we won't have up and down days," said Altabef. "But we've retested our fall  lows and at some point, you stop retesting those lows."
European markets closed higher, while Asian-Pacific stocks also finished mostly higher Monday.
Treasury prices plummeted, sending the yield on the 10-year note up to 4.55 percent from 4.37 percent late Friday. Light crude oil futures rose 1 cent to $26.55 a barrel. Gold lost 70 cents to $304.50 an ounce.
Market breadth was positive. On the New York Stock Exchange, winners topped losers by almost 4-to-1 as 1.76 billion shares changed hands. On the Nasdaq, advancers beat decliners by more than 5-to-2 as more than 1.90 billion shares traded.