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Stocks Recover After Worst Drop in 2013, but Dow Ends Shy of 14,000

Stocks finished higher Tuesday, wiping out most of the previous session's losses, boosted by a batch of encouraging earnings reports and positive economic data from Europe.

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"Buyers took control out of the gate and today's rally is just as inexplicable as yesterday's selloff. However, today's rally is not as strong as yesterday's selloff," noted Elliot Spar, market strategist at Stifel Nicolaus.

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The Dow Jones Industrial Average rallied 99.22 points, or 0.71 percent, to end at 13,979.30, but failed to close above the psychologically-important 14,000 level. UnitedHealth and Bank of America led the blue-chip gainers.

(Read More: Sucker Alert? Insider Selling Surges After Dow 14,000)

The S&P 500 climbed 15.58 points, or 1.04 percent, to close at 1,511.29. The Nasdaq jumped 40.41 points, or 1.29 percent, to finish at 3,171.58. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled below 14.

Technology, which was the worst performer on Monday, led the key S&P sectors higher.

The rally comes a day after stocks tumbled more than 1 percent amid renewed worries over Europe and as investors took a pause after the Dow topped 14,000 for the first time since October 2007 last week.

"Yesterday's pullback was a reminder of what happens when sparks fly in Europe," said Quincy Krosby, market strategist at Prudential Financial. "Markets are still going to have to face sequestration and it seems like none of that has been priced in yet because the market has been conditioned to eleventh-hour resolutions. Technically, the market's overextended and it can continue being overextended, so a pullback would be healthy and most participants would want that."

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Meanwhile, the Congressional Budget Office said the deficit for the fiscal year ending September 2013 is expected to fall below $1 trillion for the first time in four years to $845 billion, or 5.3 percent of gross domestic product, due to higher taxes being paid by wealthy Americans.

Dell agreed to be taken private in a $24.4 billion buyout deal by a consortium led by founder Michael Dell, ending the computer maker's 25-year history as a publicly traded firm. Dell shareholders will receive $13.65 a share. Shares fluctuated for most of the day but finished slightly lower. The deal marks the biggest leveraged buyout since the 2008 financial crisis.

(Read More: US Stocks Look 'Very Favorable': Goldman's O'Neill)

Among earnings, Yum Brands beat earnings forecasts for the fourth quarter, but shares fell after the parent company of KFC and Pizza Hut said same-store sales in its China division fell 6 percent and it now expects to post a mid-single digit earnings decline for 2013 from the prior year. At least three brokerages cut their price target on the company.

Kellogg edged higher after the cereal maker reported a narrower-than-expected quarterly loss, thanks to improvements in Latin America and stood by its full-year forecast.

BP gained after the British oil company topped earnings expectations, thanks to a strong performance from its refining division. The company also expects four new major upstream projects to begin production by the end of 2013.

Computer Sciences soared to lead the S&P 500 gainers after the tech company blew past earnings expectations.

And Archer Daniels Midland rose after the agribusiness giant posted higher earnings, helped by strong global demand for oilseeds.

Disney, Chipotle Mexican Grill, Panera Bread and Zynga are among notable companies scheduled to post earnings after the closing bell. (Read More: Disney Earnings Preview: All Eyes on ESPN and Theme Parks)

So far, 278 S&P 500 firms have reported quarterly results, with 69 percent topping earnings expectations, while 65 percent have exceeded revenue estimates, according to Thomson Reuters. If all remaining companies post quarterly results that match forecasts, earnings will be up 4.5 percent from last year's fourth quarter.

Boeing advanced after the Dow component formally filed a request with the FAA to allow test flights of 787 Dreamliners to resume.

McGraw-Hill tumbled to lead the S&P 500 laggards for a second session after the U.S. government launched a civil suit against ratings agency Standard & Poor's for wrongdoing in its rating of mortgage bonds prior to the 2008 financial crisis. Moody's also ended sharply lower.

Barnes & Noble shot higher after investor Daniel Tisch raised his stake in the bookstore chain to 8.1 percent, according to a regulatory filing. Tisch is currently the company's second largest shareholder after chairman and founder Leonard Riggio.

European shares finished higher as investor confidence was boosted by a series of earnings releases and positive business activity data released in the euro zone.

On the economic front, the services sector grew to 55.2 in January, according to the Institute for Supply Management's non-manufacturing index. The reading was in line with expectations according to a Reuters poll, but slightly down from 55.7 in December. Still, a reading above 50 indicates a sector expansion.

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

Coming Up This Week:

WEDNESDAY: Weekly mortgage apps, oil inventories; Earnings from Arcelor Mittal, GlaxoSmithKline, CVS Caremark, IntercontinentalExchange, Marathon Oil, Ralph Lauren, Time Warner, News Corp, Visa, Akamai, Allstate, Green Mountain Coffee, Yelp
THURSDAY: Bank of England announcement, ECB announcement, jobless claims, productivity and costs, consumer credit, Fed balance sheet/money supply, chain-store sales; Earnings from Credit Suisse, Philip Morris, Sony, Cigna, Noble Energy, Sprint, NYTimes, Activision Blizzard, Hasbro, LinkedIn, Coinstar, Opentable
FRIDAY: International trade, wholesale trade, monthly crop report; Earnings from Nissan, Moody's

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