Wall Street in rally mode

NEW YORK (CNNMoney.com) -- Stocks rallied near midday Tuesday, recovering from the previous day's selloff, as investors welcomed Hewlett-Packard's earnings and questioned whether the recent spate of bad news could make another Fed interest rate cut more likely.

The Dow Jones industrial average (Charts) added 1.1 percent almost two hours into the session, while the S&P 500 (Charts) index gained 1.3 percent. The Nasdaq composite (Charts) gained 1.6 percent.

Stocks tumbled Monday, with the Dow falling below 13,000 for only the second time since August, as Goldman Sachs' dour outlook on the financial sector and a weak report on home builder confidence sparked a broad market selloff.

After such a retreat, stocks bounced a bit Tuesday, aided by the news out of HP and perhaps speculation that the Federal Reserve is bound to cut interest rates again at the December 11 meeting, or even ahead of it.

"Partially, I think we were just reaching some unsustainable levels of negative sentiment and we were very much due for a bounce," said John Wilson, chief technical strategist at Morgan Wilson. "A little good news this morning helped."

He said that the combination of HP and hopes that the Fed will cut again constituted that good news.

Hewlett-Packard (Charts, Fortune 500) reported quarterly sales and revenue that topped expectations late Monday, sending shares modestly higher Tuesday morning.

But other corporate news was less positive. Freddie Mac (Charts, Fortune 500) reported a steeper quarterly loss and said it had set aside $1.2 billion in the quarter to account for credit losses. Shares fell 26 percent in morning trading.

Fellow government-sponsored mortgage backer Fannie Mae (Charts) slumped 18 percent. The company has been under pressure over the last few weeks after it revealed its mortgage losses, with investors questioning whether the losses are bigger than the company has so far acknowledged.

On the upside, Dow component Exxon Mobil (Charts, Fortune 500) jumped on a UBS upgrade, Briefing.com reported.

It was one of many Dow stocks bouncing back after Monday's retreat. Other gainers included Alcoa (Charts, Fortune 500), IBM (Charts, Fortune 500) and Microsoft (Charts, Fortune 500).

Market breadth was positive. On the New York Stock Exchange, winners beat losers five to three on volume of 570 million shares. On the Nasdaq, advancers beat decliners eight to five on volume of 810 million shares.

Fed funds futures show Wall Street is betting the central bank will cut rates by at least a quarter-percentage point at the Dec. meeting. But as tends to happen following a sustained period of bad news, there may also have been some speculation that the Fed could step in early.

But an emergency meeting "would be highly unlikely," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. "Anytime you have a really bad day, like yesterday, or something like with Freddie Mac this morning, you hear these rumors."

The minutes from the last Fed meeting are due for release this afternoon and should help provide clarity on how the Fed saw the economic outlook at the last meeting. In addition, the minutes should include the forecasts for the economy.

In morning economic news, October housing starts rose more than expected, while permits, a measure of builder confidence, fell more than expected.

Treasury prices fell, giving up earlier gains, raising the yield on the 10-year note to 4.11 percent from 4.07 percent late Monday. Treasury prices and yields move in opposite directions.

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

U.S. light crude oil for January delivery rose $1.66 to $96.30 a barrel on the New York Mercantile Exchange, after having been on both sides of unchanged through the morning.

COMEX gold for December delivery rose $16.50 to $794.50 an ounce.