The Dow Jones Industrial Average closed at a new record high, even as renewed worries about a subprime spillover dragged on the broader market.
"I think everything's going really well," said Ron Kiddoo, chief investment officer at Cozad Asset Management. "We think the market is being driven mostly by full employment, low interest rates, low inflation and a reasonably good economy."
"Market breadth today is not very good at all, so that would cause me a little bit of concern here for the very short-term," said John Buckingham, chief portfolio manager at Al Frank Asset Management. "But I'm in the camp that things are going to be higher at the end of the year."
The Dow held onto gains, helped by a narrow rally in blue chip stocks. The Nasdaq and the S&P 500 fell after Treasury bonds rallied on subprime jitters. Declining shares outpaced advancers by about two to one on the New York Stock Exchange.
The ABX subprime mortgage index fell to a fresh record low, rekindling fears of a possible spillover from the subprime crisis. Shares of financial stocks and homebuilders fell.
"I think what we're seeing is more technical than fundamental in nature," Mike Malone, equity sales and trading analyst at Cowen & Company, told CNBC.com. "Buying in bonds puts more pressure on Treasury yields and that will ultimately be good for stocks. I think the market is setting itself up for better-than-expected second-quarter earnings."
Verizon was one of the biggest percentage gainers on the Dow after the Financial Times reported that Vodaphone was considering a bid for the company. Verizon shares rose despite a denial of any acquisition plans from Vodaphone. Telecom was one of the best performing S&P 500 sectors. Industrials and information technology also made gains.
"I think this is the realization there's a lot of money out there that missed the rally in the first half that's chasing performance," Arthur Hogan, managing director at Jefferies, told CNBC.com. "Corporate earnings have, at worst, been benign and in some cases better than expected and I think that is what is driving things here."
The Dow rallied to within 11 points of the 14,000 mark before pulling back.
"The fact that the Dow is closing in on 14,000 confirms my belief that the Dow and domestic stocks are in the beginning phase of a bull market," Brian Hicks, president of Wealth Daily, told CNBC.com. "I think the Dow will reach 15,200 at some point this year."
This week will be filled with corporate earnings reports, key inflation data and testimony before Congress from the Federal Reserve Chairman.
"We got a whole saloon full of data coming out this week," said Arthur Cashin, director of floor operations for UBS. "Ben Bernanke gives testimony twice. I'm going to keep my eye on the yield on the 10-year and the price of oil. They could be the events of the week."
There was more M&A activity, real and rumored, for investors to digest. The Financial Times reported that Vodaphone is weighing whether to make a huge $160 billion bid for Verizon Communications . However, Vodaphone denied it has any plans to acquire Verizon.
IHOP agreed to buy Applebee's for about $2.1 billion. Under the deal, IHOP will pay $25.50 per share for Applebee's.
There was little earnings news today, but reports were encouraging.
Shares of Dow component McDonald's rose after the fast-food giant announced it will take a second-quarter loss related to the sale of some assets, but earnings before special charges will be above analysts' expectations.
Eaton Corporation raised its net income guidance for the year. The manufacturer of electrical systems and fluid power systems said second-quarter earnings per share were flat $1.64, however that was still better than the $1.47 a share analysts were expecting, according to Thomson Financial.
Mattel said its second-quarter profit rose 15%, helped by strong sales of its Wheels toys and Barbie dolls abroad. The largest U.S. toy maker said net income rose 11 cents a share. Analysts were expecting earnings of 10 cents a share, according to Reuters Estimates.
United Technologies was one of the biggest percentage gainers on the Dow ahead of its earnings report due out later this week.
"The good news is there is liquidity," said Robert Doll, global CIO of equities at BlackRock. "Earnings are good, not great anymore, but still good. There are flies in the ointment, such as subprime mortgages and higher oil prices. So you can make a connection to higher volatility, but I still think the bias is to the upside."
Christopher Bancroft, a member of the family that controls Dow Jones , is trying to buy enough stock in the company to prevent a sale of the company to News Corp , the Wall Street Journal reported.
New York light crude futures topped $74 a barrel after news of more refinery problems. A draft of a report commissioned by the government on oil and gas supplies indicates that conventional sources are unlikely to keep up with rising demand over the next 25 years, according to the Wall Street Journal.
And Ford Motor denied it is talks to sell Volvo after published reports said over the weekend that it was looking to unload the Swedish automaker, according to the AP.
The New York Federal Reserve Bank said its Empire State manufacturing activity index rose in July to 26.46 from 25.75 in June. The data was much better than expected.
European Markets Finish Mixed
The Frankfurt DAX closed modestly higher, as well as the Paris CAC-40. London's FTSE-100 finished lower.
The pursuit for Dutch bank ABN Amro continued. Shares of ABN Amro gained in Europe after a consortium led by the Royal Bank of Scotland boosted the percentage of cash in its $98 billion offer to 93% from about 70%. The offer is higher than Barclays' offer of $88 billion, which the board of ABN Amro prefers.
On the earnings front, Dutch company Philips Electronics fell short of both operating profit and sales expectations for the second quarter. Shares dropped in Amsterdam.
Shares of Swedish retailer Hennes & Mauritz gained after the company said June sales at stores open at least a year rose 17%, topping expectations for a gain of 15%.
And OMX gained after London newspaper the Telegraph reported that the owner of the Dubai stock exchange is preparing a $3.7 billion bid for the Nordic exchange.
Asian markets eased Monday after a strong performance in the morning. Seoul shares closed lower after hitting an intraday record earlier in the session, dragged down by Kookmin Bank.
With Japan' financial markets closed for a public holiday, Asian markets are focused on earnings results on Monday, including from South Korean steel maker POSCO and Indian software services exporter Tata Consultancy.
South Korean shares had their biggest fall this month, retreating from an earlier intraday record, as Kookmin Bank dropped as it faces sizeable tax payments, with other banks hit by talk of losses from U.S. derivatives investments. POSCO hit an all-time high but ended down ahead of its quarterly earnings due out after the market's close.
Australia's S&P/ASX 200 Index shed early gains to finish slightly lower, weighed down by further losses in Rio Tinto on worries it was paying a full price for Canada's Alcan. But other mining firms such as Alumina continued to rise on takeover hopes, while improved U.S. consumer sentiment buoyed U.S.-focused stocks, capping losses in the broader market.
China's Shanghai Composite Index was lower, as increasing concerns about imminent initial public offerings as well as June inflation data due later this week discouraged investors from buying stocks. China Coal Energy said it would issue up to 1.525 billion A shares in a public offering of shares in Shanghai that could be worth up to $3 billion, to develop its coal projects in China.
Hong Kong declined, as investors switched into laggards like Sun Hung Kai Properties and sold China Mobile and other recent gainers following a record-breaking run. China plays climbed, with China Coal H shares rallying on the news it would list in Shanghai, while a bullish profit guidance by China CITIC Bank sent its shares higher.
Singapore's Straits Times Index hit an all-time high, led by gains in banks DBS Group Holdings and United Overseas Bank, but ended the day just slightly lower.
Japanese markets are closed for Marine Day. Markets will reopen Tuesday. The Nikkei 225 Average closed 1.42% higher on Friday.