(RTTNews) - Stocks ended Tuesday’s session with substantial gains after seeing considerable weakness earlier in the day. A notable decrease by the price of oil along with strength in the financial sector contributed to an afternoon rally.

The markets reacted positively as the price of oil reversed its gain from the previous session, ending the day down $3.09 at $127.95 a barrel. The weakness in the commodity came amid easing concerns about supplies from the Gulf of Mexico.

While Tropical Storm Dolly is expected to strengthen to a hurricane on Wednesday, the storm is seen as unlikely to hit the major oil and natural gas refineries in the Gulf of Mexico. The storm season has yet to cause a major upward movement in energy prices this year.

With earnings season in full swing, investors also looked over a deluge of mixed corporate results. The financial sector once again got a boost even though Wachovia (WB) reported disappointing quarterly results. Investors seemed encouraged that the company has no plans to raise additional capital.

The positive momentum followed last week’s big rally after Citigroup (C), JP Morgan Chase (JPM) and Wells Fargo (WFC) saw better than expected quarterly results.

Positive earnings from DuPont (DD) and Caterpillar (CAT) prompted investors to buy up stocks as well. Caterpillar saw its second quarter earnings jump 34 percent due to stronger international sales. Likewise, DuPont also saw a rise in its second quarter profit. The chemical maker said agriculture sales and emerging markets contributed to the profit growth.

Nonetheless, the technology sector underperformed the broader markets after Apple (AAPL) reported better than expected quarterly results but issued a weak forecast.

The major averages ended the day at or near their best levels of the day. The Dow closed up 135.16 points or 1.2 percent at 11,602.50, the Nasdaq closed up 24.43 points or 1.1 percent at 2,303.96 and the S&P 500 closed up 17.00 points or 1.4 percent at 1,277.00

Sector News

Airline stocks turned in some of the best performances, benefiting from the sharp drop in oil prices as well as a 68.5 percent gain by UAL Corp. (UAUA). The Amex Airline Index climbed 22.2 percent, closing at a two-month high. The index has been trending higher for the past week.

Within the airline sector, UAL Corp. and US Airways (LCC) were two of the biggest gainers. UAL Corp. closed sharply higher after the airline extended its credit card agreements with Chase Bank, increasing its cash position by about $1.2 billion. Meanwhile, US Airways closed up 58.7 percent even though it reported a wider than expected second quarter loss.

Bank stocks also saw significant buying interest, with the S&P Bank Index closing up 11 percent. With the gain, the index set a monthly closing high. Despite Wachovia reporting a quarterly net loss of $1.27 per share, the stock closed up 27.4 percent.

Led higher by a 24 percent gain by WellCare Health Plans (WCG), health insurance stocks ended the sharply higher as well. The insurer closed up 24 percent, contributing to an 8.7 percent gain by the Morgan Stanley Healthcare Payor Index.

Other stocks that ended the day higher include brokerage, housing and networking stocks. The Amex Brokerage Index closed up 8.4 percent, the Philadelphia Housing Index closed up 4.6 percent and the Amex Networking Index closed up 3.3 percent.

On the other hand, semiconductor stocks ended the day sharply lower, with the Philadelphia Semiconductor Index closing down 4.5 percent. Texas Instruments (TXN) showed one of the biggest declines after it reported disappointing results, closing down 14.6 percent.

Resource stocks also ended the day sharply lower, hurt by a drop in commodity prices. Within the resource sector, natural gas, gold and oil service stocks were some of the biggest losers. The Amex Natural Gas Index closed down 4 percent, the Amex Gold Bugs Index closed down 3 percent and the Oil Service Index closed down 2.4 percent.

Dow Components

The Dow components rallied in the afternoon, sending the blue chip index sharply higher. Of the 30 stocks that make up the Dow, only 8 ended the day lower.

Bank of America (BAC) saw one of the biggest gains within the Dow after an analyst at RBC raised the price target for the stock to $26 from $22. While trimming the company’s 2009 earnings estimate to $3.40 per share from $3.50 per share, the analyst also reiterated a Sector Perform rating.

Shares of Bank of America closed 13.3 percent higher, extending a substantial four-day uptrend. With the gain, the stock set a five-week closing high.

Other financials ended the higher as well, including AIG (AIG), Citigroup (C) and JP Morgan Chase (JPM). AIG and Citigroup both closed up 6.1 percent, while JP Morgan Chase ended the day higher by 5.7 percent.

General Motors (GM) also saw significant buying interest after an analyst at JP Morgan noted that the automaker’s bonds are now worth buying because the company has sufficient access to capital. The stock closed up 9.4 percent, reversing the modest loss posted in the previous session. With the gain, the stock set a monthly closing high.

Home Depot (HD) and Coca Cola (KO) ended the day higher as well. Shares of Home Depot closed up 3.6 percent after an analyst said the company is poised to gain, while Coca Cola ended the day higher by 6.5 percent.

On the other hand, Merck (MRK) plunged 11.3 percent, adding to a sharp loss posted in the previous session. With the drop, the stock set a two-year closing low. Even though the drug maker reported modestly higher second quarter earnings, investors continued to react to negative news surrounding Vytorin.

Likewise, American Express (AXP) showed considerable weakness as well. The credit card issuer said Monday after the markets closed that its second quarter earnings fell 38 percent from last year. AmEx also scrapped its earnings growth forecast for 2008, citing the weak U.S. economy. The stock closed down 7.1 percent, although it moved well off of its worst level of the day.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region closed mixed on Tuesday after Wall Street finished in negative territory overnight. Japan’s Nikkei index, which did not participate in Monday’s rally in Asia on account of the market remaining closed, surged nearly 3 percent.

The major European markets also ended Tuesday’s session mixed amid the release of lukewarm corporate results. The French CAC 40 Index ended the day just above the unchanged line and the German DAX Index closed up 0.3 percent, while the U.K.’s FTSE 100 Index ended the day down by 0.7 percent.

Meanwhile, treasuries ended the day with notable losses following a weak auction of 20-year TIPS. The benchmark ten-year note dropped throughout most of the day, although it pared about half of its loss in the afternoon. Subsequently, the yield on the ten-year note closed up 3 basis points at 4.097 percent.

Looking Ahead

Looking ahead to Wednesday, the Federal Reserve will release its Beige Book, which is released roughly two weeks before the Fed’s monetary policy meetings. Investors will likely look closely at the data for any clues as to how the Fed will act at its next meeting.

On the earnings front, Washington Mutual (WM) is scheduled to report its second quarter results after the markets close on Tuesday. E*Trade Financial (ETFC) and Yahoo (YHOO) will report on Tuesday as well.

On Wednesday, ConocoPhillips (COP), Praxair (PX), Hershey (HSY), McDonalds (MCD), Boeing (BA), Anheuser-Busch (BUD), AT&T (T), PepsiCo (PEP) and Pfizer (PFE) will also report their quarterly results.

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