Stocks rise as oil's drop trumps earnings

NEW YORK (Reuters) - Stocks rose more than 1 percent on Tuesday as oil prices slid over $3 a barrel, taking the edge off a raft of disappointing earnings from American Express and others as well as a weak outlook from iPod maker Apple.

Oil, which last week had its biggest weekly decline ever, lost 2.4 percent in New York as the U.S. dollar rose, easing some worries about the impact of higher energy costs on consumers and businesses.

Consumer stocks like Coca-Cola and Wal-Mart and airlines -- all sensitive to higher fuel costs -- gained as oil prices tumbled. An index of airline stocks surged 22 percent.

The drop in oil prices dominated investor attention even as several big U.S. companies reported results that reflected

that consumers are struggling. Even companies more dependent on wealthier consumers, such as American Express, suffered. The credit card company's stock, a Dow component, plunged 7.1 percent.

There were some bright spots on the earnings front: Caterpillar shares rose 2.4 percent to $74.98 after the maker of heavy construction equipment posted a stronger-than-expected quarterly profit.

"Again it's the drop in energy prices helping the market -- the market was down quite a bit after the earnings last night, and then caught a bid with the drop in oil prices," said Frank Husic, chief investment officer at Husic Capital Management in San Francisco.

"There is a concern the whole world is going to slow and with the slowdown will come poorer times for oil."

The Dow Jones industrial average rose 135.16 points, or 1.18 percent, to 11,602.50, while the Standard & Poor's 500 Index ended up 17.00 points, or 1.35 percent, at 1,277.00. The Nasdaq Composite Index was up 24.43 points, or 1.07 percent, at 2,303.96.

WAMU AND YAHOO UP LATE

After the bell, Washington Mutual, the largest U.S. savings and loan posted a $3.3 billion second-quarter loss. But its stock rose 3.1 percent after it said it didn't need to raise more capital.

Also in extended trade, Internet company Yahoo posted a nearly 19 percent fall in net profit, and net revenue short of lowered Wall Street's expectations. But adjusted profit was in line with Wall Street's targets and the hard-hit stock edged up 0.8 percent after hours. In the regular session, Yahoo fell 1.3 percent to close at $21.40 on Nasdaq.

OIL BELOW $128 A BARREL

Oil prices fell to a six-week low amid concerns over sliding U.S. energy demand and expectations that a tropical storm pushing through the Gulf of Mexico would spare most offshore oil production.

U.S. front-month crude dropped $3.09 to settle at $127.95 a barrel.

Shares of Apple fell 2.6 percent to $162.02 and were the top drag on the Nasdaq after the maker of the iPod and the iPhone said late on Monday its current quarter earnings will be well below Wall Street's targets.

Coca-Cola shares gained 3.5 percent to $51.35 on the New York Stock Exchange, while Wal-Mart rose 3.1 percent to

$59.06.

Shares of General Electric Co rose 2.9 percent to $28.50 after the conglomerate and Abu Dhabi investment agency Mubadala Development Co said they had entered into an $8 billion joint venture.

SHORT-SALE RULE HELPS FINANCIALS

Wachovia initially dropped more than 10 percent after the fourth-largest U.S. bank said it would slash its dividend, but shares rebounded when the company said it did not plan to sell new shares to raise capital. Wachovia's stock ended up 27.4 percent at $16.79 on the NYSE.

Financial shares were boosted in part by the emergency ruling by the Securities and Exchange Commission which limits short-selling in financial firms like Fannie Mae and Freddie Mac. The curbs took effect only on Monday. But Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion, said that there is no doubt that the curbs are helping.

Short sales declined 90 percent in shares of mortgage finance companies Fannie Mae and Freddie Mac after the emergency rule took effect, according to market data firm S3 Matching Technologies. Short sells declined 70 percent in shares of the 17 other financial firms targeted by the rule, according to S3, which processes data for Wall Street dealers, brokerage houses and financial institutions

Trading was moderate on the New York Stock Exchange, with about 1.57 billion shares changing hands, below last year's estimated daily average of roughly 1.90 billion, while on Nasdaq, about 2.60 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones by 2 to 1 on both the NYSE and the Nasdaq.

(Editing by Jan Paschal)