The Dow ended with a modest gain after a pop from the Federal Reserve's rate decision fizzled.
A drop in oil prices and modestly encouraging economic reports helped prop up the market.
The Dow Jones Industrial Average ended up 4.40 points at 11811.83; the S&P 500 gained 0.6 percent and the Nasdaq shot up 1.4 percent.
The Fed left its target for the federal-funds rate at 2 percent and voiced greater concern about inflation but said downside risks to growth appear to have diminished somewhat and offered no signal of an intent to start raising rates.
"Nothing within the statement indicates an imminent rate hike, but the statement represents the second step along the path to an eventual rate hike," Tony Crescenzi of Miller Tabak wrote in a note following the Fed decision. The first step was the Fed's April 30th indication that it would stop cutting interest rates, Crescenzi said and the third step will be a statement or major speech that hints at a rate hike. Therefore, Crescenzi deduces that the earliest a rate cut would likely come would be the Sept. 16 meeting, and even then it's somewhat unlikely.
Most Fed watchers agree: Keeping rates steady was pretty much the only option the Fed had. The market would've liked to see a little stronger language on inflation to protect the dollar and put a lid on oil prices but there wasn't much else the Fed could do.
"Literally, they’ve done all they can," Michael Cohn, chief investment strategist at Atlantis Asset Management, said of the Fed. "The market's just gotta go home and rest ... heal itself and gain traction on its own. ... it's got to turn of its own accord."
Light, sweet crudesettled down more than $2 at $134.55 a barrel, after earlier being down nearly $5 a barrel on news that of an unexpected build in crude inventories last week.
Economic reports were nothing to write home about but still offered some encouragement.
New-home sales fell 2.5 percent in May to an annual rate of 512,000 units, after a 4.8 percent advance in April. It was the fifth decline in the past six months but better than the 510,000 pace economists had expected. In annual terms, home sales are down more than 40 percent. Inventories rose to a 10.9-month supply.
Mortgage applications fell for a second straight week, hitting their lowest level since December 2001 even as interest rates fell.
Orders for durable goods, which are items that are meant to last three years or more such as appliances and cars, were unchanged in May. April was revised to show a 1-percent drop, more severe than the 0.6-percent slide previously reported. Demand for nondefense capital goods excluding aircraft, which is a closely watched gauge of business spending, fell by 0.8 percent last month.
Boeing was the biggest drag on the Dow, tumbling nearly 7 percent, after Goldman Sachs downgraded the stock to "sell" from "neutral," citing weakness in the economy and rising fuel prices.
"There is more risk to the 787 program than is currently priced in as the program has yet to even enter flight test, where historically most issues on development aircraft are found," Goldman said in a note to clients.
Financials came out of the gate running, continuing the prior session's rally, but gave back some gains by the closing bell.
Lehman Brothers advanced 1.4 percent after the company said it was rehiring two executives who had left in 2007 for unspecified reasons.
Lehman said it was hiring Michael Gelband, who resigned last year as global head of fixed income, to the newly created post of global head of capital markets. It also rehired Alex Kirk, co-chief operating officer for the fixed income division, until 2007.
"Right now what you have is a trading rotational market here -- you find something that goes down, buy the dip," Gordon Charlop of Rosenblatt Securities told CNBC, citing financials and Monsanto as examples. But, that doesn't mean the market is going to follow suit, Charlop added.
"This is a good market for a trader, but I don't think it's taking off anytime soon," Charlop said.
Expectations had been for a better second quarter but that's not materializing and Charlop expects that energy concerns are actually going to pick up in the second half.
"I'm not convinced that we're going to start to see sentiment change in any dramatic fashion," he said.
Monsanto declined 3.1 percent as traders had been bidding up the biotech firm ahead of earnings and then sold off as soon as the earnings report hit. The agriculture-products maker delivered higher-than-expected earnings and raised its full-year forecast, citing strong sales of herbicides and specialty seeds.
General Mills shares fell 1.9 percent after the company, which makes everything from Cheerios cereal to Yoplait yogurt and Progresso soup, reported its profit fell 17 percentand that higher grain and energy prcies would drive up costs by about 9 percent this fiscal year.
Technology stocks held onto gains better than other sectors, with the Nasdaq up 1.4 percent. Microsoft was the biggest gainer on the Dow, climbing 2.2 percent.
Oracle shares rose 1.4 percent in regular trading and 1.5 percent after-hours after the company beat earnings and sales forecasts as new software-license revenue climbed 27 percent.
ADRs of Research In Motion rose 1.3 percent in regular trading but fell 8 percent after-hours as the BlackBerry maker's profit and sales fell short of expectations.
Elsewhere in tech, AT&T shares climbed 0.6 percent after Sanford Bernstein raised its rating on the stock to "outperform" from "market perform."
Shares of American Express slipped 2.8 percent. The credit-card provider reached a settlement with MasterCard. MasterCard will pay AmEx up to $1.8 billion to settle a dispute that MasterCard and Visa blocked banks from issuing AmEx cards. MasterCard will make payments of $150 million beginning in the third quarter, which AmEx said will help given the weakening economy and bleak outlook for consumer spending.
AmEx has already reached a settlement with Visa for as much as $2.25 billion.
More bad news for Countrywide Financial : The Illinois attorney general's office plans to sue the mortgage lender and Chief Executive Angelo Mozilo, claiming it engaged in deceptive trade practices, Reuters reported. Shares fell 1.7 percent.
Still to Come:
WEDNESDAY: Weekly crude inventories; Fed rate decision; Earnings from General Mills, Monsanto, Bed, Bath & Beyond, Nike, Oracle and RIM
THURSDAY: Jobless claims; GDP (final) with corporate profits; existing-home sales; Kansas City and Chicago Fed reports; ConAgra, Lennar earnings
FRIDAY: Personal income and spending; consumer sentiment; KB Home earnings
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