updated 7/9/2008 7:10:05 AM ET 2008-07-09T11:10:05

Wall Street finished sharply higher Tuesday as oil prices dropped for the second straight day and investors were encouraged by the possibility of more help for the ailing financial system. The Dow Jones industrials gained more than 150 points, and all the major indexes were up more than 1 percent.

Major Market Indices

Crude prices tumbled $5.33 to settle at $136.04 a barrel on the New York Mercantile Exchange, bringing oil’s two-day drop to more than $9. Other commodities also pulled back.

Speeches by Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and JPMorgan Chase & Co. Chief Executive Jamie Dimon gave the market some reassurance about the financial sector. Investors have been concerned this week about the health of government-backed lenders Fannie Mae and Freddie Mac; the two companies’ troubles helped send prices lower on Monday, but they also helped lead the rebound Tuesday.

The market was relieved to hear Bernanke say in a speech the central bank might extend its lending efforts to investment banks; the Fed began allowing the big companies to borrow after the near-collapse of Bear Stearns Cos. earlier this year. At the Federal Deposit Insurance Corp.’s forum on mortgage lending, where Bernanke spoke, Dimon said “the future is very, very bright,” but that “I do think we have some very serious issues to face.”

Paulson, meanwhile, made an upbeat assessment of the government’s efforts to prevent the volume of mortgage foreclosures that touched off the credit crisis last year, although he also said he expects foreclosures to continue.

The Treasury secretary also said he was pleased at steps taken by Freddie Mac and Fannie Mae to raise money: “Fresh capital will strengthen their balance sheets and allow them to provide additional mortgage capital, as they balance their responsibilities to their mission and to their shareholders.”

All that helped stocks stage a late-afternoon rebound after choppy trading throughout most of the session.

“A lot of money is flowing into the previous laggards,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, pointing to financials, health, and housing stocks. “It really seems like an oversold bounce.”

The Dow rose 152.25, or 1.36 percent, to 11,383.21, after moving in and out of positive territory. It was the biggest gain for the blue chips since June 13.

The advance left the Dow down 19.6 percent from its October high — just shy of the 20 percent threshold that signals a bear market. The Dow and the Standard & Poor’s 500 index have at times moved into bear territory in recent weeks, and it’s likely that fluctuations will again take them there until Wall Street is able to put together a sustainable rally.

Broader stock indicators rose as well. The S&P 500 rose 21.39, or 1.71 percent, to 1,273.70, while the Nasdaq composite index rose 51.10, or 2.28 percent, to 2,294.42.

Bond prices edged higher Tuesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.89 percent from 3.91 percent late Monday.

A drop in commodities prices appeared to help quiet some of Wall Street’s fears about inflation. The drop came as a possible signal that a slowing global economy is damping demand for energy and raw materials. Gold, silver, copper, corn and most other agriculture futures sank as oil fell. A rise in the dollar rose against other major currencies also made commodities less expensive.

Concerns about the housing market had weighed on investors the past few sessions. On Tuesday, the National Association of Realtors said Tuesday that pending sales of U.S. homes fell by 4.7 percent in May from the previous month. The worsening housing market not only stifles consumer spending, but also hurts the chances of a recovery at the banks that make loans and are invested in risky mortgage debt.

But by afternoon, the market’s mood was lifting.

Shares of Fannie Mae rose $1.88, or 11.9 percent, to $17.62; and Freddie Mac jumped $1.55, or 13 percent, to $13.46. Both mortgage lenders would need capital if a new accounting rule is enacted that would force them to put investments used as a main revenue driver off their balance sheets.

“There was just a little light today that things might be better, a real relief bounce,” said Ryan Larson, senior equity trader at Voyageur Asset Management. “Things have been beaten up so bad the past couple of weeks that investors are finding a little bit of value down here.”

Anemic economic conditions led Office Depot Inc. to forecast a nearly 10 percent drop in quarterly sales at the office supplies retailer’s North American stores that have been open at least a year. Office Depot shares fell $3.29, or 31 percent, to $7.12.

EMC Corp., tumbled $1.75, or 11.5 percent, to $13.39. The company is the majority owner of VMware, whose co-founder and CEO is leaving the company.

Investors could find further room for optimism Wednesday. Aluminum producer Alcoa Inc. posted stronger-than-expected second-quarter earnings. While profits fell 24 percent from costs tied to raw materials and facility outages, the decline wasn’t as steep as Wall Street had expected. Its stock rose in after-hours trading after falling $1.06 to $32.33 in regular trading, following other commodities producers lower.

The Russell 2000 index of smaller companies rose 24.46, or 3.72 percent, to 682.72.

Advancing issues outnumbered decliners by a 2 to 1 basis on the New York Stock Exchange, where consolidated volume came to 5.92 billion shares compared with 5.21 billion shares Monday.

Stock markets overseas slid Tuesday before Wall Street’s turnaround. Japan’s Nikkei stock average finished down 2.45 percent, Britain’s FTSE 100 fell 1.31 percent, Germany’s DAX index fell 1.43 percent and France’s CAC-40 fell 1.54 percent.

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