The Dow Jones Industrials closed with triple-digit gains as blue chips rallied on takeover speculation for aluminum giant Alcoa, a big stock buyback announced by 3M and an analyst upgrade of General Motors.
"It's more company-specific news items than anything else," said Tony Dwyer, equity market strategist at FTN Midwest Securities, in an interview with CNBC.com.
"You had a very near-term oversold market, you've had a back-and-forth tape over the last few days so today evens it out."
Dwyer said investors will shift their focus to the Federal Reserve as Chairman Ben Bernanke, who is scheduled to testify before Congress on Wednesday and Thursday. "I think you're going to see some choppy action, the attention is definitely going to shift to the Fed."
But Dwyer downplayed the impact of Bernanke's comments, saying stocks are likely to continue to trade sideways this week. "Do you chase this tape or do you wait for a meaningful pullback? People are kind of paralyzed by that."
All but two of the 30 components in the Dow Jones Industrial Average closed higher on Tuesday, led by a 6% gain in Alcoa . News reports indicated BHP Billiton and Rio Tinto may be considering making separate bids for the aluminum producer.
The S&P 500 also saw broad gains while the Nasdaq ended modestly higher. Trading action was distinctly positive with advancing stocks outnumbering declining stocks by a factor of more than two to one on the New York Stock Exchange.
General Motors traded higher after Merrill Lynch upgraded the automaker to "buy" from "sell," citing GM's liquidity in its pension plan and mounting pressure for healthcare change.
Diversified manufacturing giant 3M announced its biggest buyback ever. The adhesives maker said Monday it will repurchase up to $7 billion in common stock over the next two years.
Alcoa fueled gains for the basic materials sector, which ended with the largest daily advance among the 10 S&P sectors, which all closed higher. The energy and telecom sectors also posted gains of more than 1% while tech and healthcare lagged.
"What we're seeing is a market that's being led by the larger names and a good deal of talk about liquidity going after takeover deals," Kevin Caron, Market Analyst at Ryan Beck, told CNBC.com. "We are at a point where earnings are slowing and liquidity has entered the market in a major way as a short-term driver, leading to a good deal of speculation about takeovers."
Other potential deals which may be in the works include Applebee's, which said it is exploring a possible sale of the company. The restaurant chain withdrew its fiscal year 2007 forecast as a result.
Shares of takeover target Caremark Rx, a pharmacy benefits manager, rose 3% after CVS raised its acquisition price, bringing CVS' bid in line with a hostile offer from Express Scripts.
NASDAQ Stock Market shares plunged 11% after the company issued a disappointing earnings forecast for 2007, overshadowing fourth-quarter profits that more than tripled. The world's largest electronic stock exchange also suffered a set back over the weekend after London Stock Exchange shareholders rejected Nasdaq's hostile takeover bid.
KB Home shares rose after the company posted fourth-quarter sales above analysts' consensus forecast. The homebuilder reported a loss of 64 cents a share on sales of $3.55 billion.
Johnson & Johnson fell after it said late Monday it believed that non-U.S. subsidiaries made improper payments in connection with the sale of medical devices in two small-market countries.
New York light crude futures closed up more than 1% after the International Energy Agency raised its forecast for 2007 crude demand.
"Everybody says demand for oil is slowing down and once again the IEA is raising its forecast," Phil Flynn, senior market analyst at Alaron Trading, told CNBC.com. "Oil has risen seven-fold since 1999. This is a story of unbridled growth in China that will continue to drive demand down the road."
Treasury prices turned lower, sending yields higher.
European Markets Rise, Japan Closes At Six-Year High
Stocks closed higher in Europe on gains from automakers, airlines and miners. Germany was in the spotlight with GDP growing better-than-expected to a rate of 0.9% in the final quarter of 2006, prompting a rise in shares on the DAX. The CAC-40 closed ended positive in Paris after French officials said fourth-quarter GDP grew between 0.6% and 0.7%. London's FTSE-100 also rose.
The Nikkei 225 Average closed at its highest level since May 2000, led by gains in property shares such as Mitsui Fudosan after they reported strong earnings results last week. South Korea's Kospi Index finished just above the unchanged mark as investors bid up shares of financial companies such as Kookmin Bank, Korea's largest lender.
Hong Kong blue chips closed sharply lower with the largest one-day decline in two months. Losses of more than 2% on the Hang Seng were sparked by speculation Vodafone may sell its stake in China Mobile in order to help finance its acquisition of India's Hutchison Essar, a mobile phone operator.