Bank stocks advanced for a fourth straight session after Bank of America beat expectations but the Dow struggled to hold gains as Merck dragged on the index.
The Dow industrials and S&P 500 index held above the bear mark but the Nasdaq was riding the line, struggling to stay out of bear territory, defined as 20 percent below its recent high.
Bank of America, the second largest U.S. bank, posted its fourth straight quarterly revenue decline but the results surpassed forecasts. The earnings of 72 cents a share were 40 percent higher than the consensus estimate of 53 cents a share.
Bank of America is the latest in a string of banks to top forecasts, buoying hope for the financial sector. Still, after the sector's recent run, some traders wondered if banks are overbought and investors are very jitteryahead of tomorrow's report from Wachovia.
"We are in a bear market and counter-trend rallies are sharp and steep, but, all too often, brief," cautioned Vince Farrell of Scotsman Capital Management.
If Bank of America and Wachovia "can mildly surprise as Citi did last week with results that beat very negative expectations we will probably move higher," Farrell wrote in a guest-blog post. But Bank of America had the likelier chance of delivering a surprise and it "[c]an't be good news coming from WB," Farrell wrote.
Also in the financial sector, a large union has urged Citigroup to break itself up, saying the bank had become "too big and unwieldy to properly oversee." But a Citigroup spokesman said CEO Vikram Pandit had improved the bank's balance and governance since his appointment in December.
Overall, the banking system remains sound despite a home mortgage crisis that could cause more problems, Treasury Secretary Henry Paulson said, adding that the economy needs months to recover from its slowdown.
In economic news, leading indicators fell 0.1 percentin June after a downwardly revised 0.2-percent drop in May, the Conference Board reported. That month was initially reported as a small increase.
Adding to the dreary implications, Ken Goldstein, a labor economist at the Conference Board said, it "wouldn't take much to push the economy so that it's even weaker in the second half of 2008."
A separate report showed U.S. economic activity picked up last month but remained at a historically low level. The Chicago Federal Reserve said its national-activity index was minus 0.60 in June compared with a downwardly-revised minus 1.06 in May. The index has been negative since August 2007 but the June reading was the highest since January and marked the second straight month of improvement.
Merck was the biggest drag on the Dow after the drug maker and Schering-Plough delayed reporting earnings until after the closing bell, pending news on their joint cholesterol-busting venture, Vytorin.
Genentech hit a two-year high as Swiss drug maker Roche Holding offered to acquire all shares in the biotech company it does not currently own for $43.7 billion, or $89 a share, representing a 9 percent premium to Genentech's closing price on Friday.
Finally, a development in the Micro-hoo story: Yahoo investor Carl Icahn has been placed on the Internet search giant's board of directors in a move to settle a proxy fight between the two sides.
Icahn had led a protest over Yahoo's negotiating stance on a buyout offer from Microsoft.
Apple shares will likely be in the spotlight once again ahead of the company's earnings, due out after the closing bell. A New York Post article put the focus back on Apple chief Steve Jobs, saying concerns about his health have not abated more than a month after the company's developers' conference, when his appearance spurred speculation about a possible relapse of pancreatic cancer or other illness.
Asian stocks rallied and European shares traded slightly higher while the price of oil hovered around $130.
MONDAY: Earnings from Bank of America, Merck and Apple
TUESDAY: Earnings from Caterpillar, UPS, Wachovia, Lockheed Martin, SunTrust Bank, UAL, UnitedHealth, Yahoo and WaMu
WEDNESDAY: Weekly mortgage applications; weekly oil inventories; Earnings from AT&T, Boeing, ConocoPhillips, Pfizer, Philip Morris, Anheuser-Busch, Amazon and Pulte Home
THURSDAY: Weekly jobless claims; existing-home sales; earnings from Eli Lilly, MMM, Bristol-Myers, Dow Chemical and Xerox
FRIDAY:Durable-goods orders; consumer sentiment; new-home sales; earnings from Netflix
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