Stocks Rise as Oil Drops More Than $1

Stocks advanced, boosted by a further drop in oil following the inventory report and expectations that the House would pass the Fannie Mae-Freddie Mac rescue plan.

"Oil is definitely encouraging, it may be a bullish catalyst, but we are also actually removing what I like to call the catastrophe premium," Jessica Hoversen, fixed income derivatives from MF Global, told "Worldwide Exchange."

Nymex crude fell more than $1, trading below $128 a barrel, after a report showed crude inventories dropped by 1.6 million barrels. Oil is down about 13 percent since its all-time high above $147 hit earlier this month.

Financials got a boost from expectations that the House will approve a plan to rescue troubled mortgage-finance giants Fannie Mae and Freddie Mac .

Washington Mutual reported a larger-than-expected loss of $3.33 billion and increased its loan-loss provision but said it doesn't need to raise any more capital. WaMu shares advanced.

Regional bank stocks continued their rally amid relief that this quarter's earnings are behind us and as traders bet that the beaten-up sector may have hit bottom.

The strongest part of the rally in financials over the past four or five sessions has been short covering, Art Cashin, director of floor operations at UBS, said on CNBC. Just look at the prior session, Cashin said, when all three major indexes closed up about 1.2 percent. The fact that they were all about the same indicates technical trading.

"That’s not necessarily good, not necessarily logical buying -- It’s a guy putting a $2 bet on a quick race," Cashin said.

Still, Cashin said, short activity is a key aspect of making a bottom. "The trouble with this one is … this isn’t a normal-looking bottom," Cashin said. "It might be a platypus bottom. It might just be something strange we’ve never seen before."

Cashin said "things look reasonably safe here" for the big guys but cautioned that regional banks aren't protected by the new short-selling rule, so panic and fear could return if rumor mongers get a couple of them in their crosshairs.

Yahoo reported its earnings fell 19 percent but the Internet portal's finance chief said the company's 2008 outlook remains intact.

"Investors braced for the worst," said Jeffrey Lindsay, analyst at Sanford C. Bernstein. "[T]hese results are poor, but relative to what people were expecting, they're not so bad."

Yahoo's results were a welcome reprieve for techs, which had been punished after disappointing results earlier in the week from Apple and Texas Instruments .

Apple advanced after AT&T said the launch of the iPod 3G was strong.

McDonald's also reported earnings that beat estimates and Pepsico said strong international sales boosted its bottom line but both stocks slipped.

Elsewhere, Pfizer said second-quarter profits more than doubled, while GlaxoSmithKline reported lower profit and said it would delay a stock buyback program.

Also, AT&T met expectations with earnings of 76 cents per share as increased wireless subscribers helped profit grow, while Boeing said its profit slipped due to a delay with a military contract.

Earnings will continue to filter through with  ConocoPhilips,