NEW YORK (CNN/Money) - U.S. stocks rallied Monday on a favorable court ruling for Microsoft, ahead of Tuesday's congressional elections and bets on a Federal Reserve interest rate cut. But the market got the wind knocked out of it late in the afternoon, begging questions about whether this was really the start of a fifth week of gains.

The Nasdaq composite (up 35.84 to 1396.54, Charts) rose 2.6 percent, while the Dow Jones industrial average (up 53.96 to 8571.60, Charts) and the Standard & Poor's 500 index (up 7.39 to 908.35, Charts) both rose more modestly. All three closed well off their highest levels for the session and have closed higher for the last four weeks, with the Dow seeing its best October since 1987.

"It was fully a trader's market today... There's tomorrow's elections, there's talk of a rate cut going on for Wednesday. I think people are just trying to conserve ahead of the news," Kenneth Polcari, managing director at Polcari/Weicker, told CNNfn's Street Sweep.

The Republican party is now favored to retain control of the House of Representatives and perhaps take control of the Senate in Tuesday's elections. Republican dominance of Congress is seen by some investors as being favorable to business.

However, "unless there is something way off the radar screens on the election, it really doesn't matter. I think the market is reacting much more to its own internal forces," Charles Pradilla, chief investment strategist at SG Cowen, told CNNfn.

On Wednesday, the Federal Reserve is largely expected to cut interest rates by either one-quarter or one-half a percentage point, following a series of weak economic reports. Anticipation of a rate cut helped fuel Monday's action.

After the close of trade, chip-gear maker Applied Materials (AMAT: up $0.73 to $16.45, Research, Estimates) said it would layoff about 11 percent of its global work force due to the continued weakness of the chip industry.

"This is a very anemic recovery. It has a lot of problems with it, and we don't have dirt-cheap valuations. I firmly believe the bear market is over, but this is not going to be a roaring bull market, and I think we're going to see a lot of interruptions and halting and starting before we get a consistently better market," SG Cowen's Pradilla added.

Late Friday, a federal judge approved most of the provisions of the antitrust settlement between software leader Microsoft and the Justice Department, largely shutting the door on concerns of some states that the settlement was not aggressive enough.

Microsoft (MSFT: up $3.10 to $56.10, Research, Estimates) stock is particularly influential as it is one of the 30 issues that comprise the Dow industrials and it is the most heavily weighted stock on the Nasdaq.

"Microsoft is the second-largest company in the world, so when its shares are seeing that kind of surge, it's going to spill over into all kinds of other companies," said Peter Green, a market analyst at MKM Partners.

The stock had given broad support to the market throughout the session, but while the tech-fueled Nasdaq managed to sustain a large portion of those gains, the Dow and the S&P 500 saw a slow erosion through the afternoon, with selling in retail and defense picking up steam.

The most active tech stock was No. 1 networking gear maker Cisco Systems (CSCO: up $0.70 to $12.31, Research, Estimates). Telecom JDS Uniphase (JDSU: up $0.32 to $2.80, Research, Estimates) and Nextel Communications (NXTL: up $0.49 to $12.97, Research, Estimates) also posted substantial gains.

The networking and telecom sectors were also supported by Verizon Communications (VZ: up $0.63 to $39.22, Research, Estimates), after the company said it would expand its data business to cover large corporate and government customers.

Intel (INTC: up $0.47 to $18.77, Research, Estimates), the No. 1 chipmaker, led the semiconductor sector higher. Another notable standout was PMC-Sierra (PMCS: up $0.11 to $6.40, Research, Estimates), up 26 percent.

Shares of IBM (IBM: up $2.10 to $82.50, Research, Estimates) also rallied after the blue chip tech leader said it has built an electronic switch with speeds of 350 billion cycles per second. The switch is three times as fast as current technology and could enable the creation of higher-speed microchips, which would accelerate data transfers in wireless networks.

Shares of fellow Dow component Walt Disney (DIS: Research, Estimates), the media company, rallied after a Barron's article said that despite challenges, some value investors are buying the company's shares, as they have become attractive at the current comparatively undervalued price.

Retail selling picked up the pace as the session wore on. On the Dow, Home Depot (HD: down $1.19 to $27.21, Research, Estimates) and Wal-Mart Stores (WMT: down $1.10 to $53.45, Research, Estimates) were lower after Goldman Sachs said it was "cautious" on the retail group, including HD.

The aerospace and defense sector was dragged lower, with Lockheed Martin (LMT: down $6.15 to $50.23, Research, Estimates), Northrop Grumman (NOC: down $6.75 to $94.02, Research, Estimates) and Dow component Boeing (BA: down $0.73 to $29.67, Research, Estimates) all losing ground.

"Today is a rotational shift into high tech and away from defensive sectors, which includes aerospace and defense," said MKM's Green.

Although the pace of buying slowed a little as stocks pulled back, volume was still exceptionally strong. Market breadth was positive. On the New York Stock Exchange, advancers topped decliners by more than 9 to 7 as 1.61 billion shares traded. On the Nasdaq, winners beat losers by almost 5 to 3 as 2.34 billion shares changed hands.

European markets closed higher, while Asian-Pacific stocks closed higher Monday. Tokyo markets were closed for a holiday.

Treasury prices fell, sending the 10-year note yield up to 4.04 percent from 3.99 percent late Friday. Treasury prices and yields move in opposite directions. The dollar was weaker versus the euro and was little changed versus the yen.

Light crude oil futures slipped 18 cents to $26.95 a barrel. Gold was slightly lower.