Stocks End Higher as Oil Falls Below $125

Stocks rose for a second straight session as financials rallied and oil broke below the key $125-a-barrel mark.

The Dow Jones Industrial Average rose nearly 30 points, or 0.3 percent, to close at 11632.38. The S&P 500 index gained 0.4 percent and the Nasdaq advanced 1 percent.

"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 CNBC.

Nymex crude fell below $125 a barrel, settling at $124.44 a barrel. An earlier report showed a 1.6-million-barrel drop in crude inventories. Oil is down about 13 percent since its all-time high above $147 hit earlier this month.

For most of the day, stocks see-sawed with oil prices. Expectations that the House would pass the Fannie Mae-Freddie Mac rescue plan boosted financials. Some analysts noted that the new SEC rules on shorting certain types of financial firms have prompted some hedge funds to unwind their long-oil, short-financials trades.

Financials rose 1.9 percent, buoyed by expectations that the House will approve a plan to rescue troubled mortgage-finance giants Fannie Mae and Freddie Mac .

Shares of both Fannie and Freddie rose more than 11 percent.

Brokerage stocks struggled to remain above water but 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.

(Is the rally in financials for real? Click on the video at left.)

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."

After the closing bell, Birinyi Associates pointed out that just six days ago, the financial sector was the most oversold it's ever been since the Crash of 1987. Now, less than a week later it's not overbought but has logged its biggest six-day change ever, surging 31 percent.

Washington Mutual was an exception among the regional banks, tumbling 20 percent after the bank reported a larger-than-expected loss and increased its loan-loss provision but said it doesn't need to raise any more capital.

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.

AIG was the biggest gainer on the Dow, rising 7 percent, while

Boeing was the biggest drag, falling 3.7 percent, after the aerospace giant said its profit slipped due to a delay with a military contract.

AT&T gave a boost to techs after it met expectations with earnings of 76 cents a share, helped by an increase in wireless subscribers. AT&T shares rose 3.9 percent.

Apple advanced 2.6 percent after AT&T said the launch of the iPhone 3G was strong.

Yahoo reported its earnings fell 19 percent but the Internet portal's finance chief said the company's 2008 outlook remains intact. Its shares dropped 4.7 percent.

The AT&T and Yahoo results were a welcome reprieve for techs, which had been punished after Apple issued a profit warning for the current quarter and Texas Instruments missed its second-quarter target amid weak cellphone-chip sales.

McDonald's also reported earnings that beat estimates and Pepsico said strong international sales boosted its bottom line. McDonald's shares fell nearly 1 percent while Pepsi gained 2.3 percent.

Elsewhere, Pfizer said second-quarter profits more than doubled, while GlaxoSmithKline