Stocks ticked higher amid some encouraging economic data. Lehman Brothers rebounded after a recent slide but financials remained under some pressure ahead of a slew of earnings out of the sector next week.
Light, sweet crudedropped below $123 a barrel as the EIA reported crude inventories unexpectedly fell by 4.8 million barrels last week but that was largely due to the fact that refiners worked their plants harder to crank out gasoline and distilllates, resulting in a larger-than-expected build there. News that India has raised fuel prices also helped depress crude prices.
Guest blogger John Kilduff, senior VP of energy at MF Global, said he thinks we'll see even lower oil prices ahead-- testing $120 and then $110 a barrel -- amid classic "demand destruction" and the recovery in the U.S. dollar.
On Wednesday, however, the dollar declinedamid concerns about the financial sector.
The Institute for Supply Management reported its gauge of the service sector grew for a second straight monthamid a solid increase in new orders. Still, a measure of inflation jumped and the employment component slipped.
In other economic news, ADP Employer Services said the private sector added 40,000 jobs in May, well above the 60,000 decline expected by analysts. The news prompted futures to strengthen slightly, although they remained in negative territory. That gave some traders hope for a good jobs report from the Labor Department on Friday but it's worth noting that the ADP report is frequently at odds with the government report.
U.S. productivity grew at a slightly faster-than-expected pace of 2.6 percent in the first quarter; that was revised up from the initial estimate of a 2.2 percent annual rate. Labor costs rose 0.7 percent from a year earlier, the smallest increase since 2004.
"We think all the conditions necessary for a bottom were in place in March," Craig Callahan, founder of Icon Advisers, told CNBC. "We think we’re off on a rally now and it’s higher from here," Callahan said. "People often miss rallies because rallies don’t look like rallies and don’t feel like rallies," he said, citing the rally in 2003 in which the market gained 42 percent in eight months but 40 percent of the trading days during that time were down days.
American Express was the biggest gainer on the Dow after CEO Kenneth Chenault said the company is experiencing mounting credit losses but it won't affect the company's outlook, which calls for profit growth of 4 to 6 percent this year.
Lehman Brothers, which has been in the crosshairs of shorts looking to make it another Bear Stearns, rebounded after Merrill Lynch upgraded its rating on the stock to "buy" from "underperform." Early, the stock skidded on news the brokerage is taking steps to offload riskier assets to deleverage its balance sheet. Lehman could be looking at strategic partners overseas, with at least one in South Korea, the Wall Street Journal reported.
Still, that doesn't mean all is well in financial land. Options traders were still buying put options on Lehman, which Jon Najarian, founder of optionmonster.com, said was due to worries about next week's earnings.
Lehman, as well as Morgan Stanley and Goldman Sachs are expected to report next week.
Bank of America skidded after Merrill Lynch analysts said the bank may incur mark-to-market writedowns of between $10 billion and $12 billion because of losses at mortgage lender Countrywide Financial.
Hovnanian shares declined after the homebuilder reported its loss increase tenfold from a year earlier. On CNBC Wednesday, Hovnanian CEO Ara Hovnanian said the company has ample liquidity to weather the slowdownand expects to stay cash-flow positive for the full fiscal year.
Rival Toll Brothers rose for a second straight day after the luxury homebuilder posted a loss that wasn't as bad as investors had feared.
Mortgage applications fell for a third straight week to the lowest in more than six years, the Mortgage Bankers Association reported earlier this morning.
On the M&A front, jelly maker J.M. Smucker confirmed that it plans to buy Folgers coffee from Procter & Gamble in an all-stock deal, the Journal reported.
Just when you thought you'd heard the end of Micro-hoo, surprise! Yahoo President Susan Decker said the company is in "ongoing, engaged talks"with Microsoft . Yahoo shares rose.
And United Airlines parent UALplans to cut its fleet by 70 aircraft due to high fuel prices, the Journal said.
Still to Come:
WEDNESDAY: Bernanke, Lockhart speak
THURSDAY: Jobless claims; Fed's Plosser speaks; Earnings from Nat Semi
FRIDAY: Jobs report; wholesale trade; consumer credit; Fed's Evans, Bullard speak
Send comments to cindy.perman@nbcuni.com.