Investors struggled to figure out where the economy is headed after reports showing a modest increase in jobless claims and weakness in the manufacturing sector.
The data pointed to an economy that is hurting, but not experiencing as rough a time as many investors expected after the near-collapse of the mortgage market.
"We're not quite out of the woods," Lance Helfert, founder and president of West Coast Asset Management said on CNBC. "Things are getting better but there's still some more shoes to fall. I think we have to wait til the fourth-quarter til things improve in a great way."
The Labor Department said the number of laid off-workers applying for jobless benefits rose last week by 6,000 to 371,000 — near the average analyst forecast, and suggesting that the labor market remains weak but in check.
Another better-than-expected report came from the Philadelphia Federal Reserve, which said regional manufacturing activity is contracting in May more slowly than in April, and more slowly than analysts expected.
However, the Federal Reserve dealt the market a blow when it said industrial output sank for the second straight month in April. The decline of 0.7 percent, driven by big cutbacks in the automotive and other manufacturing industries, was more than double the drop analysts predicted.
Investors also listened to a speech by Federal Reserve Chairman Ben Bernanke in Chicago. Bernanke said he is "encouraged" by recent efforts by banks to raise cash — a trend that is helping to relieve the credit crisis.
In recent weeks, investors have been growing more optimistic recently that the economy may not be as weak as many feared, and that inflation, despite the soaring price of oil, is not out of control. But a major concern for the market is whether higher food and energy costs are hampering Americans' ability to spend.
"Generally things are better than the bad we expected," said Linda Duessel, market strategist at Federated Investors in Pittsburgh. "We've had a big storm and now it's only raining slightly, but Bernanke is saying that it's not plain sailing for the financial sector yet. The fact we've started to see M&A beginning to pick up again a little is a start."
But not everyone is as optimistic.
"These (jobless claims) numbers are not good news," said Kurt Karl, chief U.S. economist at Swiss Re in New York. "We are in an elevated unemployment period because of tight credit, higher oil prices, inflation hurting consumers. To me, it just continues to deteriorate. It's just grinding higher in unemployment."
--Reuters and AP contributed to this report