A late selloff pushed stocks lower at the close as strong economic data and encouraging comments by the Fed was offset by profit-taking and a spike in energy prices.
"We're seeing a little bit of weakness, but the market not selling off tremendously is an overall positive," said Robert Pavlik, chief investment officer at OakTree Asset Management. "Today's action is sort of profit taking from what happened yesterday when the market was very strong in the latter half of the day."
"But there is some skittishness in the market right now," he added. "We've come very far in a short amount of time."
Fed Chairman Ben Bernanke said during a speech in Chicago earlier today that troubles in the mortgage market will not likely affect the broader economy, giving equities a lift earlier in the session.
The Dow Jones Industrial Average traded just a few points below the unchanged mark but the blue chip index hit an intraday high, rising above the 13,500 level for the first time. The S&P 500 saw modest declines while the Nasdaq Composite also fell due to weakness in chips and biotech stocks.
Markets dipped at midday after surprisingly strong economic data prompted speculation that a Fed interest rate cut may be less likely. The Philadelphia Fed index, a regional measure of manufacturing activity, came in at a four-month high for May, indicating a firmer economy.
"We have had a quarter where things were a little soft and where the manufacturing economy has been soft, but it looks like we may have worked through some of those inventory problems in that sector," said Thomas Atteberry, analyst and portfolio manager at First Pacific Advisors.
Higher oil prices also weighed on investor sentiment. Light sweet crude futures jumped 3.7% to cclose at $64.86 a barrel on the New York Mercantile Exchange.
Market strategists downplayed the impact of the recent rise in crude oil, which has closed higher in five of the last six sessions.
"$70 will scare people," said Adam Tracy, head of listed trading at Thomas Weisel. "We're still below $65 but it is getting on people's radar screens."
"Bernanke's comments are what everyone is focused on right now," Tracy added. "People are focused on that and any inflation number or growth number."
Three of 10 economic sectors tracked by S&P moved higher but energy, up 1.8%, was the only significant upside mover. Caterpillar was the biggest drag on the Dow after Stifel Nicolaus downgraded the stock to "hold" from "buy," citing valuation concerns.
M&A news continued to flow unabated as Blackstone Group agreed to acquire Alliance Data Systems for $6.4 billion, or $81.65 a share, sending the stock up 24%.
Shares of Acxiom also rose sharply after the provider of information management solutions said late Wednesday it was will be acquired for $2.25 billion by two private equity firms.
Internet advertising firm 24/7 Real Media will be bought out by British advertising giant WPP Group for $649 million, the companies announced Thursday. Shares of 24/7 rose just 4%, however, due earlier speculative gains following rumors of a possible bid from Microsoft .
Weakness hit the tech sector after Hewlett-Packard shares fell despite the company reporting a 27% rise in quarter operating profit after the bell Wednesday. HP said cost-cutting measures and strength in its personal computer and printer businesses helped boost its bottom line.
Chip stocks such as Maxim Integrated Products and Nvidia contributed to early declines but moved off the day's lows.
Sun Microsystems shares rose 4% on heavy trading volume after the network hardware maker announced a $3 billion stock buyback plan.
In other economic news, the number of Americans filing new claims for jobless benefits unexpectedly fell 5,000 last week, government data showed, while a more reliable barometer of labor trends fell to its lowest in more than a year.
Treasury prices fell, sending yields higher.
Europe Closes Higher, Asian Stocks Gain
European shares closed higher following a positive session in Asia as earnings and takeover speculation kept buyers in the market.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all ended with gains.
Shares of BT Group rose after the company unveiled a stock buyback plan worth almost $5 billion and announced an 11% rise in quarterly earnings, in-line with analysts' expectations.
Speculation regarding a potential takeover of Capitalia by UniCredit continued as Italian newspapers reported the companies may meet Sunday to approve a deal that would create Europe's largest bank in terms of market cap.
Asian markets closed mostly higher with exporters advancing on the stronger dollar, which was also bolstered by surprisingly upbeat U.S. industrial output.
Japan reversed earlier gains to close in negative territory, weighed down by a late selloff in machinery stocks. Tokyo's Nikkei 225 Average declined 0.17% as Japan's growth data added to concerns about corporate capital spending.
Sony gained after issuing a solid earnings forecast and shares of other exporters advanced on a weaker yen, limiting losses in the Nikkei.
South Korea's Kospi Index finished nearly 1% higher to a record close, as shipbuilders such as Hyundai Heavy Industries recovered from recent falls on continued expectations booming order books will bolster earnings.
China's Shanghai Composite Index climbed more than 1%, crossing back into the psychologically key 4,000 level after a recent tumble that was fueld by investors' fears of a larger selloff.