NEW YORK (CNNfn) - The Nasdaq composite index rallied Wednesday for its fifth gain in six sessions, as investors poured money into chip stocks after Merrill Lynch turned bullish on the hard-hit sector.
The No. 1 brokerage said the semiconductor business may be poised for recovery and upgraded 11 stocks, including Micron Technology and Texas Instruments.
"We think that the worst is past in terms of the downturn," Joe Osha, one of the Merrill analysts behind the upgrades, told CNNfn's Market Call.
The Dow Jones industrial average finished little changed as gains in Intel, the No. 1 chip maker, and IBM, a big chip buyer, offset losses United Technologies, Caterpillar and General Motors.
Still, more stocks rose than fell on the major exchange – gains that brought plenty of skepticism about longevity.
"I don't think this rally has any more sustainability than any of the rallies we've seen over the last six months," Kim Fennebresque, president of SG Cowen, told CNNfn's Street Sweep.
The latest gloomy report on the manufacturing sector showed factory activity contracting for the 12th straight month. But that lifted some hopes for lower interest rates from a Federal Reserve trying to keep the economy growing.
"People are joining the camp of easier money for a longer period of time," said Ned Riley, chief investment strategist at State Street Global Advisors. "The Fed should be willing to provide any and all support."
The action came Wall Street closed the door on July, a month when hundreds of companies said sales or profits would fall short. No major warnings surfaced on the first day of August.
"There has been a dearth of negative news, which to the market has to be a sign of good news," Riley said.
The Nasdaq composite index rose 41.25 points, or 2 percent, to 2,068.38, its highest close since July 13. The Dow Jones industrial average shed 12.80 to 10,510.01 and the Standard & Poor's 500 index added 4.70 to 1,215.93.
Market breadth was positive. On the New York Stock Exchange, advancers beat decliners 1,825 to 1,269 as 1.2 billion shares changed hands. Nasdaq winners topped losers 2,186 to 1,524 on volume of 1.7 billion shares.
In other markets, Treasury securities ended little changed. The dollar fell against the euro and yen.
Chips are up
In a note to clients, Merrill Lynch signaled that the chip business, hit by slowing demand for computers and telecommunications gears, may be ripe for a turnaround.
The firm upgraded 11 chip companies including Texas Instruments (TXN: up $2.13 to $36.63, Research, Estimates) and Micron Technology (MU: up $1.70 to $43.70, Research, Estimates), saying the industry may have bottomed.
"We believe that the worst of the downturn is now behind us," said Merrill's report, titled "Train's Back in the Station – Climb Aboard."
Intel (INTC: up $0.94 to $30.75, Research, Estimates) and Applied Materials (AMAT: up $2.44 to $48.30, Research, Estimates), a maker of chip equipment, also rose.
Investors trying to pick the bottom of the chip business have been burned before. And Merrill's note held plenty of caveats, mentioning historical weakness in the current quarter, stiff competition and high inventories.
Still, the gains spread to chip buyers such as Dell Computer (DELL: up $0.25 to $27.18, Research, Estimates) and IBM (IBM: up $1.85 to $107.06, Research, Estimates).
Priceline.com (PCLN: up $0.65 to $9.52, Research, Estimates) reported its first profit late Tuesday, earning 5 cents per share on an operating basis in the second quarter. The online travel service also said current quarter earnings will top previous estimates.
Priceline joins an elite group of profitable Internet companies, including Yahoo! (YHOO: up $0.67 to $18.29, Research, Estimates), eBay (EBAY: down $0.95 to $61.62, Research, Estimates), and Expedia (EXPE: down $1.03 to $47.31, Research, Estimates).
Still, market rallies over the last 12 months have proven short-lived. And David Briggs, trader at Federated Investors, said Wednesday's gains likely will be another bear trap.
"We're still in a downtrend," Briggs CNNfn's The Money Gang.
"I'd like to see some follow-through right now and I'm going to stay on the sidelines until I'm proven otherwise."
Among other gainers, KLA-Tencor (KLAC: up $2.71 to $57.10, Research, Estimates), which makes chip-testing equipment, reported a fourth-quarter profit of 29 cents per share, topping estimates.
The biggest gainer on the New York Stock Exchange, Cooper Industries (CBE: up $11.39 to $52.90, Research, Estimates), rose after Danaher (DHR: down $0.29 to $56.30, Research, Estimates), a maker of electronic testing equipment, made an unsolicited bid to buy the manufacturer for $5.5 billion.
In decliners, Cigna (CI: down $13.66 to $86.65, Research, Estimates), the insurer, posted a profit that missed forecasts and warned that future profit will fall below estimates.
PepsiCo (PEP: down $2.94 to $43.69, Research, Estimates) fell after the Federal Trade Commission voted to end its investigation of the soft drink producer's $13.8 billion acquisition of Quaker Oats (OAT: up $12.30 to $100.30, Research, Estimates), clearing the way for the deal's completion.
Jones Apparel Group (JNY: down $6.59 to $32.45, Research, Estimates), an apparel maker, reported second-quarter earnings that fell short of Wall Street expectations.
On the Dow, Caterpillar (CAT: down $1.15 to $53.95, Research, Estimates), General Motors (GM: down $0.93 to $62.67, Research, Estimates), and United Technologies (UTX: down $1.04 to $72.36, Research, Estimates) all fell.
General Motors, the world's biggest automaker, said its July sales fell to 360,881 units from 397,187 a year ago, a drop of 9 percent.
The prior three months, the April-June period, was Corporate America's worst quarter in a decade.
NAPM falters
Manufacturing contracted again last month, and showed surprising weakness. The National Association of Purchasing Management's July manufacturing index fell to 43.6. That's below Briefing.com's survey of economists, who expected a reading of 44.7 percent to match the June figure.
Readings below 50, which have now occurred for 12 straight months, indicate a shrinking manufacturing sector.
Separately, the government said construction spending fell 0.7 percent in June, below expectations.
Still, the weak numbers support the case for another interest rate cut by the Federal Reserve, which meets in three weeks.
On the first day of August, investors may hope for a repeat of last August, when the Nasdaq rose 13 percent and the Dow industrials gained 6.2 percent. But since then, the Nasdaq has fallen more than 50 percent.
"Things have been so gloomy, (but) now many people sense the bottom is here and we'll start to drift upward," Michelle Clayman, chief information officer at New Amsterdam Partners, told CNNfn's Before Hours.
Friday brings the week's most-anticipated economic report: July jobs data. The nation's unemployment rate, which bottomed at a 30-year low of 3.9 percent in October, is expected to have ticked up to 4.6 percent last month. That would be the highest level in more than three years.
But 4.6 percent is historically low. Unemployment peaked at 10.8 percent in 1982. 
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