Market rises on Cisco outlook and drop in oil

NEW YORK (Reuters) - Stocks rose on Wednesday, building on the previous day's big gains, as a further drop in oil prices and a reassuring outlook from Cisco Systems (CSCO.O) overshadowed persistent credit concerns.

Cisco, the maker of equipment that directs Web traffic, set the tone for tech shares after it posted a stronger-than-expected quarterly profit and said it expects the weak economic environment to be relatively short lived. Its shares jumped nearly 6 percent.

A drop in the price of oil to a three-month low below $118 a barrel helped the broader market recover from early declines sparked by home finance company Freddie Mac's wider-than-expected loss. Freddie (FRE.N) also set plans to slash its dividend by at least 80 percent as it braced for a prolonged housing crisis.

"It's good to see the market holding onto yesterday's gains. Cisco is probably responsible for much of the Nasdaq's move," said John Forelli, portfolio manager at Independence Investments LLC in Boston.

The Dow Jones industrial average .DJI rose 40.30 points, or 0.35 percent, to 11,656.07, while the Standard & Poor's 500 Index .SPX gained 4.30 points, or 0.33 percent, to 1,289.18. The Nasdaq Composite Index .IXIC rose 28.54 points, or 1.21 percent, to 2,378.37.

Forelli noted that some commodity-related shares, which investors had unloaded earlier this week amid fears a global economic slowdown could dent demand, rebounded.

"The fundamentals in these commodity-related stocks are still pretty good -- it could be bargain-hunting, maybe it's also a little more belief that the economic growth story is not completely over," Forelli said.

Shares of miner Freeport McMoran (FCX.N) jumped 11 percent to $87.67, while fertilizer producer Mosaic Co (MOS.N) rose 2 percent to $112.73. Analysts said a $10 billion takeover bid unveiled by miner Xstrata (XTA.L) for the world's third-biggest platinum producer, Lonmin (LMI.L), also helped fuel interest in the materials sector.

The technology sector also got a lift from a report that Microsoft Corp (MSFT.O) may buy back as much as $20 billion of its stock to boost its share price. Shares rose 3.1 percent to $27.02 after the report by Bloomberg News, citing a UBS analyst. Microsoft could not be reached for comment.

Shares of Cisco rose 5.7 percent to $23.93.

On the Dow, shares of heavy equipment maker Caterpillar Inc (CAT.N) rose 3.4 percent to $70.51, helped by lower oil prices. Investors have worried that higher fuel prices could cut into corporate profits.

Oil briefly fell below $118 a barrel -- far below records above $145 set in July -- after government data showed that crude oil supplies rose much more than expected last week. Crude finished the session at $118.58 per barrel.

Earlier, Freddie Mac's wider-than-expected loss pushed stock prices lower and stoked concern about the outlook for the financial sector.

Freddie Mac said it was doubling the money set aside for bad loans. Its shares fell 19.3 percent to $6.49. The S&P financial sub-index .GSPF fell 1 percent.

"I don't see much light at the end of the tunnel," said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm in Toledo, Ohio. "I still think there will be more problems, not only with Fannie and Freddie, but also with a number of banks," he said.

Trading was thin on the New York Stock Exchange, with about 1.19 billion shares changing hands, below last year's estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.24 billion shares traded, above last year's daily average of 2.17 billion.

Advancing stocks outnumbered declining ones on the NYSE by 17 to 14 on the NYSE and by 4 to 3 on the Nasdaq.

(Additional reporting by Ellis Mnyandu; Editing by Leslie Adler)