Stocks ride blue-chip wave

NEW YORK (CNNMoney.com) -- Blue chips led a broad stock market rally Tuesday, as investors welcomed takeover talk about Alcoa, a rebound in commodity shares and an upgrade of GM.

Wednesday brings reports on retail sales and business inventories but also the start of Federal Reserve Chairman Ben Bernanke's two-day semi-annual monetary policy report to Congress.

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The Dow Jones industrial average (up 102.30 to 12,654.85, Charts) gained more than 100 points, or around 0.8 percent, while the S&P 500 (up 10.89 to 1,444.26, Charts) index rose just short of 0.8 percent.

The tech-fueled Nasdaq (up 9.50 to 2,459.88, Charts) composite added 0.4 percent.

Treasury prices were little changed. The dollar slipped versus other major currencies. Oil prices gained around 2 percent.

Stocks benefited from the day's M&A activity, with strength in the basic materials sector - including Alcoa - helping to lead the advance, said Michael Sheldon, chief market strategist for Spencer Clarke.

A variety of metals, mining, energy and other commodity stocks, as well as railroads were all contributing to the gains too, he said.

The blue-chip advance was broad- based, with 28 out of 30 Dow stocks gaining, while tech shares were less upbeat, limiting the Nasdaq composite's gains.

The advance was also part of the broader uptrend that has lifted stocks since the summer.

"The momentum in the market continues to be to the upside," said Peter Dunay, investment strategist at Leeb Capital. "Earnings growth has slowed but is still pretty good, and the economy is looking healthy. The strength in the market is still there."

After the close, Applied Materials (Charts) reported quarterly earnings of 29 cents per share, up sharply from a year ago and above forecasts. The company also reported higher sales that missed estimates.

However, investors focused on the chip gear-maker's strong earnings and bullish forecast, sending shares more than 4 percent higher in extended-hours trading.

Stock investors seemed to take in stride the morning's economic news that showed the trade gap surged more than expected in December and hit a record in 2006.

The trade gap might have had a bigger impact on markets typically but was overshadowed by anticipation ahead of Bernanke's testimony.

Concerns about what the Fed chief might say weighed on financial markets Monday, along with a big selloff in commodity prices and the underlying stocks.

Investors will be looking to see if Bernanke's 2007 economic outlook is "focused more on the recent signs of stronger growth and lower core inflation, or on the impact from the slowdown in the housing market," Sheldon said.

Although Bernanke is unlikely to say anything that would unsettle the markets, the testimony could pose some surprises, Dunay said, depending on what issues the newly Democratic-controlled Congress chooses to raise.

Among stock movers Tuesday, Dow component Alcoa (up $2.10 to $35.00, Charts) jumped 6.4 percent on talk that either BHP (up $1.01 to $45.02, Charts) or Rio Tinto (up $6.56 to $216.99, Charts) might bid as much as $40 billion for the aluminum maker.

The news followed Monday's heavy spate of merger news and rumors.

Additionally, Applebee's (up $2.09 to $26.32, Charts) jumped 10 percent in unusually active Nasdaq trading after the dining chain said it was considering selling itself, among other options.

Caremark Rx (up $1.97 to $62.88, Charts) rose 3 percent in active trade after drug store CVS (down $0.40 to $32.09, Charts) increased its bid for the pharmacy benefits manager by tripling a proposed special cash dividend to $6 a share.

3M (up $1.84 to $76.43, Charts) surged 2.5 percent after the Dow component said its board approved a $7 billion share buyback plan and boosted its quarterly dividend.

Dow component General Motors (up $0.88 to $36.59, Charts) rose 2.5 percent after Merrill Lynch upgraded it to "buy" from "sell."

Exxon Mobil (up $0.85 to $75.45, Charts), Sunoco (up $1.10 to $61.08, Charts) and ConocoPhilips (up $1.24 to $67.27, Charts) were among the oil stocks jumping in tune with the commodity.

On the downside, the Nasdaq Stock Market (down $4.00 to $31.10, Charts) slumped 11.4 percent in active trade, as investors continued to ditch the stock following news Monday that it lost its bid for the London Stock Exchange. The failed deal overshadowed the company's strong quarterly earnings, announced Tuesday.

KB Home (up $1.49 to $53.43, Charts) said it swung to a loss in the fourth quarter, nonetheless results topped forecasts and the stock rose.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by more than 11 to 5 on volume of 1.45 billion shares. On the Nasdaq, advancers topped decliners 8 to 7 on volume of 1.76 million shares.

U.S. light crude oil for March delivery rallied $1.25 to settle at $59.06 a barrel on the New York Mercantile Exchange. Oil prices slid 3.5 percent Monday after the oil ministers of Saudi Arabia and Qatar said OPEC may keep crude output unchanged at its March meeting.

COMEX gold for April delivery rose $1.20 to $668.50 an ounce.

Treasury prices inched lower, raising the yield on the benchmark 10-year note to 4.81 percent from 4.80 percent late Monday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and yen following the trade gap report.

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