Techs fuel stock rally

NEW YORK (CNNMoney.com) -- Technology shares jumped Friday on a potential merger in the software industry, while broader gains were limited as investors welcomed strong economic news, but questioned how it will impact interest-rate policy.

The Dow Jones industrial average (Charts) and the S&P 500 (Charts) index both gained modestly with about 25 minutes left in the session, after hitting all-time intraday highs on Thursday.

The Nasdaq composite (Charts) added 0.8 percent. The tech-heavy index hit a fresh 6-1/2 year high a few days ago.

Stocks had been stronger in the early afternoon but lost a little momentum late in the session.

"The market today is just slightly higher, with the Nasdaq up more because it sold off so hard yesterday," said Timothy Ghriskey, chief investment officer at Solaris Asset Management.

Ghriskey said that the move into the sector was rotational, as much as a response to a possible sale of BEA Systems, sparked by Oracle's bid for the software firm.

Technology led a broader selloff Thursday, with investors backtracking after pushing the major gauges to multiyear highs in the morning. But after that breather, investors were back in rally mode Friday.

Oracle's bid for BEA, McDonald's improved earnings forecast and GE's strong quarterly results highlighted the session's positive corporate news as the earnings reporting period gets underway.

Wall Street also embraced a strong read on retail sales and a mild reading on inflation. Although on the downside, those reports may have also dampened hopes that the Federal Reserve will cut interest rates at its next policy meeting that ends Oct. 31, as was evident by rising Treasury bond yields.

However, concerns that the economy might be at risk of perking up too much were tempered by weaker-than-expected reports on business inventories and consumer sentiment.

The reports seemed to further recent hopes that the economy is in the sweet spot between growth that is strong but not inflationary. If that proves to be true, that would put the economy in a place not so different from where it was before the housing market slump and credit crisis raised fears of recession, said Douglas Roberts, managing principal at Channel Capital Management.

"The global central banks have the credit crisis under control, the overhead resistance from inflation is waning and recession fears are starting to recede quite a bit," Roberts said. "So it's a very positive environment for stocks."

In other news, U.S. light crude oil for November closed at an all-time high of $83.69 a barrel, according to early tallies. Oil briefly hit a record trading high of $84.05 a barrel during the session before pulling back.

In corporate news, Oracle (Charts, Fortune 500) made a $6.7 billion bid for software maker BEA Systems. The all-cash offer would represent a 25 percent premium over BEA's closing price Thursday.

However, BEA said in the afternoon that it had rejected the offer, which it says undervalues the company, a move that could set up a bidding war between Oracle and rival SAP.

Oracle shares were unchanged, while BEA (Charts) shares jumped 35 percent.

In other corporate news, General Electric (Charts, Fortune 500) reported higher quarterly earnings that met estimates. However, investors took a 'sell the news' approach and sent shares of the Dow component lower.

And fellow Dow component McDonald's (Charts, Fortune 500) said third-quarter earnings will top earlier forecasts, thanks to strong global sales. The company also reported a 5.9 percent rise in September sales.

Shares of Coldwater Creek (Charts) slumped 26 percent after the retailer warned late Thursday that it will report a quarterly loss versus forecasts for a gain.

Centex shares fell after the homebuilder warned that it expects to post a quarterly loss.

Market breadth was positive. On the New York Stock Exchange, winners topped losers 9 to 7 on volume of 920 million shares. On the Nasdaq, advancers beat decliners 3 to 2as 1.77 billion shares changed hands.

Retail sales jumped 0.6 percent in September, double what they rose in the previous month and above forecasts. Sales excluding autos rose 0.4 percent, after falling 0.4 percent in the previous month. Economists surveyed by Briefing.com thought sales would rise 0.3 percent, on average.

The Producer Price Index (PPI) rose 1.1 percent in September after falling 1.4 percent in the previous month, topping estimates. The so-called "core" PPI, which strips out food and energy prices, rose 0.1 percent, short of forecasts. Core PPI rose 0.2 percent last month.

Reports on consumer sentiment and business inventories, released in the mid-morning, were both weaker than expected.

The University of Michigan's consumer sentiment index fell to 82.0 in early October from 83.4 at the end of September. Economists, on average, thought it would rise to 84.0.

Inventories rose 0.1 percent in August after rising 0.5 percent in July. Economists thought inventories rose rise 0.3 percent.

Treasury prices slumped, raising the yield on the benchmark 10-year note to 4.68 percent from 4.63 percent late Wednesday. Bond prices and yields move in opposite directions.

In currency trading, the dollar gained versus the yen and euro.

COMEX gold for December delivery fell $2.90 to $753.80 an ounce.