NEW YORK (CNN/Money) - U.S. stocks rose Wednesday as investors began a new trading year amid signs that the worst may be over for the hard-hit manufacturing and chip businesses.
Chip stocks rose after a trade group said sales gained for a second straight month. But the biggest surprise came from the Institute for Supply Management, whose report on manufacturing activity jumped to its highest level in more than a year.
"The manufacturing sector is still shrinking but at a much slower pace than earlier in the year," said Bruce Steinberg, chief economist at Merrill Lynch.
Stocks drifted for much of the session, which brought a rash of brokerage downgrades. Kmart, AOL Time Warner and eBay joined nearly 30 other firms that saw their stock ratings cut just weeks before details emerge about a dismal fourth quarter for profits.
With Wednesday's gains, stocks reversed some of their losses from Monday, which capped a second straight money-losing year for the market. Still, the gains are also part of a three-month advance that began nearly two weeks after the September terrorist attacks.
David Briggs, head trader at Federated Investors, is cautious about stocks in the near term. "I think we've got a little pent-up profit taking next week and I think there are some pent-up (disappointing company) pre-announcements," he said.
The Dow Jones industrial average rose 51.90 points, or 0.5 percent, to 10,073.40, while the Nasdaq composite index gained 28.85, or 1.5 percent, to 1,979.25. The Standard & Poor's 500 index gained 6.59, or 0.6 percent, to end at 1,154.67.
On the New York Stock Exchange, advancing stocks edged declining ones as 1.1 billion shares changed hands. Nasdaq losers topped winners as nearly 1.5 billion shares traded.
In other markets, the dollar gained against the yen and fell versus the euro, a day after it was introduced in cash form in 12 European countries. Treasury securities fell.
Uneven start
The Institute for Supply Management (ISM) said its index of manufacturing activity jumped to 48.2 in December, much higher than expectations for a gain to 45.8.
Components of the index - including new orders and production - also surpassed forecasts, according to the ISM, formerly known as the National Association of Purchasing Management.
Still, December marked the 17th straight month that the index stayed below 50, meaning that manufacturing still is contracting.
"I still think people are worried about that," Mark Donahoe, institutional trader at U.S. Bancorp Piper Jaffray, told CNNfn's Halftime Report.
There were positive developments in the semiconductor industry. Chip sales rose 1.6 percent in November, the second straight monthly gain, a trade group said. And South Korea's Hynix Semiconductor is raising prices on the chips it sells to computer makers, a signal that demand is picking up.
Intel (INTC: up $1.55 to $33.00, Research, Estimates), the biggest chipmaker, jumped nearly 5 percent amid anticipation of a recovery in semiconductor demand.
But Prudential Securities slapped a rare sell rating on Kmart (KM: down $0.72 to $4.74, Research, Estimates) amid worries that the
retailer's fourth-quarter results will disappoint.
eBay (EBAY: down $0.73 to $66.17, Research, Estimates), the online auctioneer, and AOL Time Warner (AOL: down $0.50 to $31.60, Research, Estimates), the media company that owns CNN/Money, also suffered from downbeat brokerage comments. At least 29 other companies drew sour words from analysts.
Nasdaq's biggest loser, Sierra Wireless (SWIR: down $3.70 to $15.15, Research, Estimates), which makes wireless equipment for portable computers, said fourth-quarter results will fall short. Sykes Enterprises (SYKE: down $0.62 to $8.72, Research, Estimates), a provider of outsourcing and professional services, said it expects fourth-quarter results to be at the lower end of its previous guidance.
The Washington Post said Monsanto (MON: down $1.00 to $32.80, Research, Estimates) knowingly dumped toxic waste into an Alabama waterway.
But AT&T rallied, helping to offset losses in Dow components 3M (MMM: down $1.07 to $117.14, Research, Estimates) and Home Depot (HD: down $0.62 to $50.39, Research, Estimates).
AT&T plans to raise long-distance prices by as much as 16 percent, according to Reuters and the Associated Press. Merrill Lynch, bullish on the company's sale of its cable business to Comcast, upgraded AT&T to "buy" from "neutral."
The market's gains follow a year when U.S. stocks capped their worst two-year performance since the mid-1970s. The Dow industrials fell 7.1 percent last year after a 6 percent slide in 2000. The Nasdaq lost 21 percent following a tumble of more than 39 percent in 2000.
But the Nasdaq is up 39 percent since Sept. 21, while the Dow is sporting a 22 percent gain as investors anticipating better times this year bought stocks. Bonds, meanwhile, have been falling in recent weeks amid predictions that a rebounding economy will mean higher interest rates and rising inflation.
As for stocks, most strategists are bullish on 2002, predicting that cheaper borrowing costs, tax cuts and low energy prices will get the economy growing again.
"We are going to have some fluctuations which will create opportunities,"
Tony Dwyer, market strategist at Kirlin Holdings, told CNNfn's Market Call.
Investors hope so. The Dow industrials have not fallen for three straight years since 1941. 
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