In a late-day rally, stocks finished higher Tuesday as crude oil prices pulled back and the dollar rose. The market had been wobbly most of the session amid a raft of negative earnings reports, led by Wachovia Corp. (WB), which posted a staggering second-quarter loss and announced it was cutting its dividend and 6,350 jobs, and a disappointing forecast and lower gross margins at Apple (AAPL).

On Tuesday, the Dow Jones industrial average rose 135.16 points, or 1.18%, to 11,602.50. The broader S&P 500 index gained 17 points, or 1.35%, to 1,277.00. The tech-heavy Nasdaq composite index finished up 24.43 points, or 1.07%, to 2,303.96.

In the energy markets, August NYMEX crude oil fell $3.84 to $127.20 a barrel. A combination of a sharply higher dollar, and the easing of storm concerns in the Gulf of Mexico, weighed heavily on energy prices, and the market shifted its focus to waning demand due to slowing global growth, says Action Economics. Natural gas had fallen more that 4% at the close, at one point trading under $10/MM BTU for the first time since April. Gasoline shed 7 cents a gallon to $3.15, a two-month low, says Action Economics.

Philadelphia Fed President Charles Plosser jolted the markets Tuesday by saying the Fed needs to raise rates "sooner than later" despite current economic conditions. "We think his comments were surprisingly strong-worded given that he did not dissent at last month's FOMC meeting, but are in line with his position as the committee's most consistent hawk," said Zach Pandl at Lehman Brothers in a note Tuesday.

Peter Orszag, director of the Congressional Budget Office, said a federal rescue of troubled mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM) could cost taxpayers as much as $25 billion. But he predicted in a letter to lawmakers that there's a better than even chance the government will not have to step in to prop up the companies by lending them money or buying stock. Congress is expected to vote this week on a housing measure that would give the Treasury Dept. authority to throw Fannie and Freddie a temporary lifeline.

Treasury Secretary Hank Paulson, optimistic of congressional action, said it's important to stabilize GSEs but warned of "speed bumps" along road.

Washington Mutual (WM) shares rallied in after-hours trading after the bank reported a second quarter loss of $3.33 billion, or $6.58 per share, vs. a profit of $830 million, or 92 cents per share in the year-ago period [results include a one-time reduction of $3.24 related to the company's capital raising in April]. Analysts expected a loss of $1.05 per share. WaMu boosted its loan loss reserves by $3.74 billion to $8.46 billion.

Among other stocks in the news Tuesday, Wachovia Corp. (WB) said Tuesday it lost $8.86 billion, or $4.20 a share, in the second quarter, vs. net income of $2.34 billion, or $1.22 a share, a year ago.