Stocks End Near Highs, Rebounds From Worst One-Day Drop in 2013; Vix Skids 11%

Stocks ended near their best levels Tuesday, recovering from their worst one-day drop in 2013, following Fed Chairman Ben Bernanke's speech and buoyed by a batch of upbeat economic reports.

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Major averages initially spiked higher after Bernanke defended the central bank's easy monetary policy, overturning fears from last week that the Fed might scale back its bond-buying program. But stocks gradually pulled back throughout the duration of his speech, with the S&P 500 and Nasdaq dipping into negative territory, as the Chairman failed to offer much new information to excite investors.

"It's standard talk and he didn't really rock the boat—the Fed is going to keep purchasing the bonds the way it is," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.

The Dow Jones Industrial Average rallied 115.96 points, or 0.84 percent, to end at 13,900.13, led by Home Depot and Intel.

The S&P 500 climbed 9.09 points, or 0.61 percent, to finish at 1,496.94. The Nasdaq gained 13.40 points, or 0.43 percent, to close at 3,129.65. Earlier, the Nasdaq traded at its lowest level since January 15.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, tumbled more than 11 percent to close below 17.

Most key S&P sectors ended in positive territory, led by materials and consumer discretionary, while financials ended lower.

Major averages tumbled more than 1 percent across the board in the previous session, with the S&P 500 breaking below 1,500 and the Dow retreating sharply from its fresh multi-year high.

Federal Reserve Chairman Ben Bernanke strongly defended the central bank's bond-buying plan before the Senate Banking Committee, saying the benefits outweigh possible costs. Bernanke also urged lawmakers to avoid sharp spending cuts set to go into effect at the beginning of March, which he warned could combine with earlier tax increases to create a "significant headwind" for the economic recovery. (CNBC Explains: Sequester)

"Although monetary policy is working to promote a more robust recovery, it cannot carry the entire burden of ensuring a speedier return to economic health," said Bernanke. "The economy's performance both in the near-term and in the longer run will depend importantly on the course of fiscal policy. The challenge for the Congress and the administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery."

Before Bernanke's testimony, stocks were higher thanks to a trio of upbeat economic reports.

"Today's [rally] almost seems like a dead cat bounce to me—yes, we had decent data and earnings this morning so those are good signs, but we've noticed that small and mid-caps have started lagging (the broader market), which signals that a risk-off period may be coming quickly," said Detrick.

On the economic front, home prices rose in December, according to the S&P Case-Shiller's composite index of 20 metropolitan areas. Prices in the 20 cities jumped 6.8 percent year-over-year, posting the best gain since 2006.

New home sales jumped in January to a seasonally adjusted annual rate of 437,000, the highest since July 2008, according to the Commerce Department. It was the biggest monthly increase in nearly 20 years. Homebuilders including KBHome and Pulte shot higher following the report.

And consumer confidence ticked higher in February to its best level since November, according to the Conference Board.

European shares tumbled to close a three-month lows after Italy's election resulted in deadlock, with no party gaining sufficient seats to win a majority in the country's upper house. Analysts warned a government stalemate in the euro zone's third-largest economy would make it even harder to pass key legislation needed for structural and fiscal reforms. The euro plunged near a seven-week lowagainst the U.S. dollar.

(Read More: Why Italy's Stalemate Could Mean Chaos for Euro Zone)

"It was the worst possible outcome, feared by market participants and European policy-makers alike," said Tobias Blattner, European economist at Daiwa Capital Markets. "Italy is facing Greek-style political gridlock and possibly new elections."

JPMorgan dipped after the banking giant said it announced plans to save $1 billion in 2013 through various costs cuts and about 4,000 job reductions.

Meanwhile, Best Buy announced it will cut approximately 400 workers at its headquarters, related to a larger restructuring move announced last November. Earlier, UBS lifted its price target on the firm to $18 from $12.50. The consumer electronics retailer is scheduled to post earnings on Friday.

Apple gained amid speculation the iPhone maker could announce plans to enhance shareholder value at its shareholder meeting on Wednesday. The stock has plunged more than 35 percent since hitting an all-time high of $705 back in September. Apple has been trading below its 50-day moving average for nearly five months.

Among earnings, Home Depot soared to lead the Dow gainers after the home improvement retailer posted results that topped expectations. The company also announced it would buy back as much as $17 billion of its own shares, and raise its dividend 35 percent to 39 cents from 29 cents a share. On Monday, rival Lowe's topped Wall Street expectations, with sales benefiting from rebuilding after Superstorm Sandy.

Macy's rose after the department store retailer reported quarterly results that exceeded Wall Street expectations.

Tivo, Dreamworks Animation and Priceline.com are among notable companies scheduled to post earnings after the closing bell.

The government auctioned $35 billion in 5-year notes at a high yield of 0.78 percent. The bid-to-cover ratio, an indicator of demand, was 2.85.

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

Coming Up This Week:

WEDNESDAY: Weekly mortgage applications, durable goods orders, Ben Bernake speaks, pending home sales, oil inventories, 7-yr note auction, Apple shareholders mtg, Coinstar shareholders mtg; Earnings from Target, Dollar Tree, TJX, Groupon, JCPenney, Limited Brands, Monster Beverage
THURSDAY: GDP, jobless claims, Chicago PMI, natural gas inventories, Fed's Raskin speaks, Farm Prices, Fed's Fisher speaks, Fed's Evans speaks, Oppenheimer investor mtg; Earnings from Kohl's, Sears, Barnes & Noble, Gap, Salesforce.com
FRIDAY: Personal income & outlays, PMI manufacturing index, consumer sentiment, ISM mfg index, construction spending, Ben Bernake speaks, auto sales; Earnings from Best Buy, Foster Wheeler

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