Stocks held onto modest gains, boosted by an an unexpected drop in jobless claims and merger buzz in the utility sector. Oil was a bargain around $132, after earlier surpassing $135 a barrel.
The Dow Jones Industrial Average and S&P 500 were up about half a percent; the tech-heavy Nasdaq fared slightly better.
That snapped a two-day losing streak due to oil's relentless ascent and simmering inflation worries.
"It's been so encouraging that the market's done reasonably well since mid-March when the Fed broke the log-jam in the credit markets," Hugh Johnson, chief investment officer of Johnson Illington Advisors, told Reuters.
"But it's very hard to make the case that with oil at $135 a barrel, it's not going to have a significant impact on the U.S. economy. That has to raise lots of worries among investors who care so much about the economy and earnings," Johnson said.
Jobless claims dropped by 9,000last week; economists had expected a slight uptick. The four-week moving average, however remained at a more than four-year high, climbing to 372,250.
Stocks held onto modest gains even after a report showed a significant drop in home prices during the first three months of the year. Home prices fell 1.7 percentin the first quarter from the prior quarter and were down 3.1 percent from a year earlier, according to Ofheo's seasonally-adjusted purchase-only index. Both drops were the lowest on record.
California, Nevada and Florida logged the biggest price declines. Eight states saw prices drop more than 3 percent during the quarter; prices plunged 8 percent in California.
Federal Reserve Governor Randall Kroszner said the mortgage market is going to be slow to recover.
"Recovery in the mortgage market will take time and will require more market and regulatory discipline," Kroszner said in remarks prepared for delivery to a bankers' conference this morning on Amelia Island, Fla.
Financials rebounded after taking a pounding in the past two sessions. Citigroup and JPMorgan were the top two gainers on the Dow.
Ford shares skidded after the auto maker lowered its profit outlook, saying it no longer expects to return to profitability in 2009. The company also plans to cut North American production.
Rival General Motors was the biggest decliner on the Dow.
Pfizer shares , which are at a 1 1/2-year low, fell after researchers late Wednesday reported some disturbing physical side effects, including blurred vision and loss of consciousness, from the company's anti-smoking drug Chantix. These physical side effects, on top of the already-known psychological side effects that incude suicidal thoughts, were enought to prompt the FAA to ban use of the drug by pilots and air-traffic controllers.
Calpine shares surged after power company NRG Energy made an unsolicited $11-billion bidfor its rival.
Calpine, which emerged from bankruptcy earlier this year, said it was reviewing the bid to determine if it was in the best interests of its shareholders. It said it received the unsolicited proposal from NRG on May 14.
Crude oilpulled back to around $131-$132 a barrel after earlier jumping above $135 a barrel as supply concerns persisted. Those concerns were exacerbated by numbers released Wednesday by the Energy Information Administration showing an unexpected decline in crude reserves.
The impact of rocketing oil prices continued to manifest itself in a variety of ways.
Shares of Suntech Power Holdings , which have been under intense pressure all year, rose after the company reported better than expected quarterly earnings, citing swelling demand for renewable energy sources.
Quarterly earnings reports continued to wind down, but the market was watching news from a few retailers.
Women's clothing company Ann Taylor reported lower quarterly profit due to restructuring costs, but earnings of 47 cents a share were still slightly ahead of analyst estimates.
Barnes & Noble reported its loss widened and slashed its full-year sales forecast, citing the tough retail environment. The bricks-and-mortar bookseller also confirmed that its mulling "a transaction" with rival Borders Group .
Still to Come:
THURSDAY: Earnings from Gap; Libertarians choose presidential candidate
FRIDAY: Existing-home sales; Bond market closes early for Memorial Day holiday
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