NEW YORK (CNN/Money) - Stocks surged Wednesday as investors cheered Kmart's $11 billion merger with Sears and solid earnings from Hewlett-Packard.

Treasury bonds rallied, gold closed at a 16-year high and the dollar hit another low against the euro. Oil prices rebounded.

The Nasdaq composite (up 21.06 to 2,099.68, Charts) added 1 percent, closing at a fresh 2004 high.

The Dow Jones industrial average (up 61.92 to 10,549.57, Charts) and the Standard & Poor's 500 (up 6.51 to 1,181.94, Charts) index both gained around 0.6 percent.

"It's been impressive," said David Briggs, head of equity trading at Federated Investors. "There's a lot of cash coming into the market."

The advance marked a return to rally mode after Tuesday's mild pullback. The major gauges have risen for most of the past three weeks, leaving them at their highest levels of the year.

"I think confidence is higher," said David Briggs, head of equity trading at Federated Investors. "There's a sense of 'What are we worried about now?' because we got through the rise in interest rates, the election, we're dealing with the energy prices. I think people are feeling better."

While the session's gains were solid, the market had been higher in the early afternoon before losing some steam, due to a rebound in oil prices and investor fatigue.

"There was a lot of good news this morning, and a lot of money rushed into the market," said John Hughes, market analyst at Shields & Co. "After that kind of rush you're seeing the buying power dry up a bit in the afternoon."

Both analysts cautioned that the market is likely to hit a period of consolidation soon, perhaps leading into next week's Thanksgiving holiday, when volume tends to be light.

Tech stocks could open weaker Thursday following after-hours news from Applied Materials (Research).

The chip gear maker warned that an oversupply of chips would hurt orders and sales in the fourth-quarter. The outlook overshadowed the company's improved quarterly earnings report, and shares fell in after-the-bell trade.

Thursday brings a trio of economic reports.

The weekly jobless claims report is due before the open. Economists surveyed by Briefing.com expect that 333,000 Americans filed new claims for unemployment last week, unchanged from the previous week.

The index of leading economic indicators (LEI) is due shortly after the bell. LEI is expected to have fallen 0.1 percent in October after falling 0.1 percent in September.

At midday, the Philadelphia Fed index in due. The index probably fell to 23.2 in November from 28.5 in October.

The big deal of the day was Kmart (up $7.78 to $109.00, Research) buying Sears (up $7.79 to $52.99, Research) for about $11 billion in cash and stock, creating the nation's No. 3 retailer. Kmart shares jumped 7.7 percent while Sears soared 17.2 percent, though both stocks had been even higher earlier in the session.

The deal also gave a boost to a number of other retail issues. Federated (up $1.31 to $56.68, Research), owner of Macys and Bloomingdale's, rose 2.4 percent, Dillard Department Stores (up $1.60 to $26.65, Research), a regional chain and possible takeover target, jumped 6.4 percent, and JC Penney (up $0.70 to $40.68, Research) added 1.8 percent.

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But Wal-Mart and Target, which may face stiffer competition from the new Sears-Kmart combo, both fell. Wal-Mart (down $0.65 to $56.24, Research) lost 1.1 percent and Target (down $0.36 to $51.02, Research) slipped 0.7 percent.

Hewlett-Packard (up $0.52 to $20.20, Research) reported fiscal fourth-quarter earnings late Tuesday of 41 cents a share, up from 36 cents a year earlier and 4 cents more than expected. Revenue also rose and surpassed estimates. Fiscal year 2005 guidance was mostly in line.

HP shares gained 2.6 percent in active New York Stock Exchange trade. Shares had been up 5 percent in the morning.

Network Appliance (up $4.55 to $29.57, Research) rallied more than 18 percent after the maker of data storage products reported improved quarterly earnings late Tuesday and also boosted its 2005 outlook.

A variety of other tech stocks rose, with Sun Microsystems (up $0.39 to $5.35, Research), Intel (up $0.48 to $24.32, Research) and Advanced Micro Devices (up $1.11 to $21.99, Research) all strong.

Altria (up $3.03 to $57.42, Research) shares added 5.6 percent on news that a federal appeals court was divided over whether the government has the authority to force cigarette makers to pay billions in past profits as part of its racketeering case against the industry.

Market breadth was positive. On the New York Stock Exchange, advancers beat decliners 11 to 5 on volume of 1.68 billion shares. On the Nasdaq, winners beat losers by 2 to 1 on volume of 2.24 billion shares.

Countering the upbeat news: oil prices, which snapped their recent losing streak and rose after a weaker-than-expected government oil inventory report. Light crude for December delivery gained 73 cents to settle at $46.84 a barrel on the New York Mercantile Exchange.

Adding to the positive sentiment was the morning's mostly upbeat economic news.

The consumer price index, the most widely watched measure of inflation, rose 0.6 percent in October, after advancing 0.2 percent in September. Economists surveyed by Briefing.com thought it would increase 0.4 percent.

The "core" CPI, which excludes volatile food and energy, edged up 0.2 percent after increasing 0.3 percent in September. Economists thought it would be up by 0.1 percent.

On Tuesday, stocks slumped on inflation fears after a report showed the biggest jump in wholesale prices in almost 15 years. As such, the mostly in-line CPI report proved comforting.

A separate report released early Wednesday showed strong factory output in October.

Industrial production rose 0.7 percent in October after climbing 0.1 percent in September. Economists thought it would increase 0.4 percent.

A housing market report showed October housing starts rose to a 2.027 million unit annual rate, topping expectations, while building permits fell 0.7 percent, surprising economists who thought permits would increase.

Treasury prices rallied, pushing the yield on the 10-year note down to 4.13 percent from 4.20 percent late Tuesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar fell to another record low against the euro and also declined against the yen.

COMEX gold for December delivery jumped $4.60 to $445.10 an ounce, the highest in 16 years, gaining along with other dollar-traded commodities.