NEW YORK (CNNfn) - A late surge on Wall Street Monday was led by renewed hope for an economic and corporate profit turnaround as traders positioned themselves ahead of an anticipated interest rate cut by the Federal Reserve.
"The stock market rally today is because we drove the market down to levels that were on the cheap side and when you get news like the leading indicators saying things are going to be good for the economy and profits, that attracts buyers," Hugh Johnson, chief investment strategist with First Albany, told CNNfn's Street Sweep.
Trading conviction, however, remained tepid -- between the Fed meeting Tuesday and summer vacations, few investors found any compelling reason to buy or sell stocks with enthusiasm.
The Dow Jones industrial average advanced 79.29 points to 10,320.07. The Nasdaq composite index gained 14.34 points to 1,881.35, while the Standard & Poor's 500 rose 9.44 to 1,171.41.
By contrast, on Friday, the Nasdaq composite index fell to its lowest levels in more than four months. The Dow, meanwhile, lost more than 150 points, led by General Motors, after rival automaker Ford cut earnings forecasts and announced job cuts
There also was a trickle of corporate news on Monday for investors to chew on, particularly related to companies that comprise the Dow Jones industrial average.
Still, it was a quiet day.
"By and large there's nothing going on," said Bryan Piskorowski, market commentator with Prudential Securities. "Merck is really propping up the Dow and there may be some position squaring going into the (Fed) meeting."
For example, the Dow was driven by a second session of selling in General Motors (GM: down $3.47 to $56.00, Research, Estimates) and Caterpillar (CAT: down $1.00 to $52.75, Research, Estimates), countered by buying in Merck (MRK: up $1.43 to $70.58, Research, Estimates) and Johnson & Johnson (JNJ: up $1.10 to $54.85, Research, Estimates).
On Friday, Moody's Investors Service and Standard & Poor's said they may lower their debt rating on GM. That, coupled with the woes of Ford, weighed on the automotive sector for the second trading day in a row.
Among more positive stock news Monday, Merck's subsidiary, Merck-Medco, announced Monday it has achieved an 80 percent generic substitution rate for members taking Prozac who use home delivery -- within just one week of generic availability.
But the Fed was really the main issue on investors' minds Monday. While most market participants expect a quarter-percentage-point cut when the policy-setting Federal Open Markets Committee meets Tuesday, observers will read the accompanying statement for signs of whether or not the Fed sees some economic stability. But it may take longer than previously anticipated.
"The U.S. economy shows further signs of stabilizing, though a true recovery is still some months away," Bruce Steinberg, chief economist with Merrill Lynch, wrote in a research note. "Consumers will determine the near-term outlook and signs are positive."
Market breadth was positive. On the Nasdaq, advancers nudged out decliners 1,877 to 1,811 on volume of 1.12 billion shares. On the New York Stock Exchange, winners beat losers 1,769 to 1,338 as 875 million shares changed hands.
In overseas stock markets, Asia's and Europe's fell. Treasury securities edged lower. The dollar rose against the euro and the yen.
Gearing up for the Fed
Tuesday's Fed meeting is expected to bring this year's total number of rate cuts to seven, with the key federal funds rate having been brought down by 3 percentage points to 3.75 percent.
More important will be the Fed's accompanying statement. Now that the second-quarter corporate results are finally reported, investors are looking for signs that the economic slowdown is steadying and getting ready for some turnaround by early 2002.
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 BRACING FOR THE FED
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Fed Walkup
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With little in the way of corporate or economic news, trading likely will continue in a narrow range Tuesday. But analysts also said there could be a late rally in anticipation of the Fed's move.
"People are bid up the market by the close to get ahead of the Fed on the hope of a 'Fed bounce' tomorrow (Tuesday)," said Art Hogan, chief market analyst with Jefferies & Co. "We're still well within the time frame of the Fed's monetary policy stimulating the economy, but people are just tired of waiting for it."
While not typically a market mover, the Conference Board reported that its Index of Leading Economic Indicators rose 0.3 percent in July, in line with the consensus of economists surveyed by Briefing.com and matching the increase in June.
The index was enough to give investors some comfort, as it is often looked upon as a forecast of economic activity three to six months down the road.
"They [the leading indicators] have been rising for four successive months and given time, those (six) Fed rate cuts are going to kick in and we'll have better economic activity," said First Albany's Johnson.
Dribble of corporate news
Lowe's (LOW: up $2.80 to $37.84, Research, Estimates), the No. 2 home improvement retailer, reported fiscal second-quarter earnings of 42 cents a share, up from 36 cents a share a year earlier and 1 cent above the consensus of analysts surveyed by First Call.
Toys 'R' Us (TOY: up $1.62 to $24.02, Research, Estimates) posted a sharp loss for its fiscal second quarter, in line with Wall Street's lowered expectations, as the No. 2 toy retailer continued to spend heavily on store remodeling amid an economic slowdown. 
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