"Expect the market to be fairly mercurial—especially this week. The volume is still pretty anemic," said Keith Bliss, senior vice president at Cuttone & Co. "The longer-term trend is still positive, since we sold off so harshly last week, but we're going to have bumps in the road. We're in a period where economic data will be OK to good, but not enough to make the Fed really back away from its policy."
Earlier, New York Fed president William Dudley reiterated his comments that the Fed's asset purchases could continue at a higher pace than that outlined last month by Chairman Ben Bernanke, if the labor market and economic growth lagged the central bank's expectations.
"Statistically, if the first half of the year is positive, it tends to set a positive tone for the second half, but these are based on data that include periods where markets were not focused on liquidity from central banks," said Quincy Krosby, market strategist with Prudential Financial.
On the economic front, factory orders gained 2.1 percent in May, rising for a second-straight month, according to the Commerce Department. Economists polled by Reuters had expected a gain of 2 percent.
Adding to jitters, Portugal's foreign minister Paulo Portas resigned in protest against austerity measures. His resignation came after finance minister Vitor Gaspar stepped down from his post Monday, complaining he lacked political support for his austerity program. But Portugal's prime minister says he "won't resign" despite the resignations of two key members, adding that his government will continue to battle to restore the restore the country's financial health.
Separately, tensions remained high in Italy's fragile coalition government. Prime Minister Enrico Letta called a government meeting after the Civic Choice (Scelta Civica) party threatened to withdraw from the coalition on Monday, citing frustration with the slow pace of reforms.
Meanwhile, a weaker currency helped the Japanese Nikkei, which crossed the key 14,000 points to hit a new one-month high. The Shanghai Composite reversed earlier losses to rise above the 2,000 mark, its highest level in over one week.
The Federal Reserve Board of Governors approved two bank reform measures. Large bank stocks, which initially rallied following the news, eventually turned lower along with the broader market. JPMorgan was the only major bank to finish higher.