Stocks were on pace to close at record highs yet again, although on modest gains, as a series of upbeat economic reports, and a positive outlook from shipping giant Federal Express, continued to give investors reasons for optimism.
The Dow Jones Industrial Average rose more than 35 points after falling slightly in the previous session.
Alcoa, Hewlett Packard and Bank of America led blue chips higher, while American Express and JPMorgan fell.
The S&P 500 and the Nasdaq rose. The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell below 18.
Most key S&P sectors rose, led by industrials, materials and consumer staples.
The market may have received some support Thursday after the world's biggest bond fund, Pimco Total Return Fund, expanded its investment guidelines to allow for flexibility to hold up to 10 percent in "equity-related" securities, such as convertibles and preferred stock, according to an SEC filing. The fund manages $256 billion in assets.
Another factor in the market's moves may be "quadruple witching," which takes place Friday. That's the quarterly event when stock index futures, stock index options, stock equity options and single stock futures expire. Volume and volatility among stocks and derivatives usually increases in the days before these contracts simultaneously are closed out, although volume was relatively light on Thursday.
Shares of MasterCard and Visa plunged more after news the Federal Reserve plans changes to debit-card transaction fees that could affect the credit-card processing firms. The proposal includes an option for a 12-cent cap on debit card fees.Volume in the firms' shareswas up over 240 percent from their 10-day average volume.
Shares of Discover Financial Services as well as American Express, which issue credit cards as well as process credit card transactions, also sank. Earlier Discover posted a profit that beat expectations, but its shares slipped after the credit card firm's results were mainly driven by reducing the money set aside to cover bad loans.
The news also hurt banks that issue credit cards, including Bank of America, JPMorgan,Citigroup , Wells Fargo and PNC.
Financials as a group lost ground, but remained higher. Earlier the sector was affected by Keefe Bruyette & Woods' decision to downgrade the large cap bank sector to "market weight," from "overweight," citing slow economic growth, consumer deleveraging, expansionary monetary policy and more regulation.
At the same time, the brokerage shifted its opinion on capital markets firms to "overweight" from "market weight," saying the environment in 2011 will lead to more capital market activity.
Specifically, Keefe Bruyette downgraded Bank of Americato "market perform" from "outperform," but the stock was higher after news it initiated potential settlement discussions with several mortgage investors.
Among larger banks, Keefe was more positive about JPMorgan Chase and State Street because of their capital markets businesses.
And the brokerage also recommended Wells Fargo
Among investment banks, Keefe raised its price target on Goldman Sachs to $210 a share from $198, but cut its target for Morgan Stanley to $30 a share from $31.
Keefe also downgraded BB&T and Comerica to "market perform" from "outperform."
And Lehman creditors filed a rival reorganization plan saying the proposal filed by Lehman in March favors big creditors and banks.
Economic bellwether FedEx gained, despite a disappointing earnings report, as investors focused on the shipping company's long-term outlook. Also, the fiscal second quarter results, which were well below market estimates, were dragged down by changes in compensation and benefits as well as higher fuel costs.
General Mills fell after the foodmaker reported disappointing results. The firm, however, reaffirmed its full-year guidance.
Winnebago shares soared after the manufacturer of motor homes posted better-than-expected earnings for the fifth consecutive quarter as sales of recreational vehicles continued to rise.
and Oracle were expected to report earnings after the bell. Oracle shares slipped despite Macquarie Equities upgrad of the stock to "outperform" from "neutral," on momentum from integrated hardware and software products.
Apple rose slightly after Kaufman raised its price target for the tech giant to $395 a share from $380.
Meanwhile, Nokia filed new patent infringement complaintsagainst Apple in the UK, Germany and the Netherlands, related to the company's touch screen interface.
Baidu shares slipped for a second day after a senior executive of the Chinese search engine forecast the site's top and bottomline growth rates to be moderate over the next year.
Starbucks got a boost from Goldman Sachs, which added the coffee company to its "conviction buy" list and named the company its best restaurant investment idea heading into 2011.
The performance of the stock is seen by some as an indicator of economic health, and employment. (Read more: Starbucks Java Job Indicator Perking Up.)
The action came as Goldman resumed coverage of the restaurant sector with an "attractive coverage" view. Goldman gave Chipotle Mexican Grill and Tim Hortons "buy" ratings, and Yum Brands , McDonald's and Panera Bread , "neutral" ratings. The brokerage, however, rated Wendys/Arby's a "sell."
Aeropostale soared on a report in the New York Post that the teen retailer hired Barclays Capital as a strategic adviser to ward off approaches from private-equity firms that may be interested in the company.
Johnson & Johnson slipped after news the Food and Drug Administration was in the middle of uncovering a host of problems at the pharmaceutical giant's manufacturing plant that was the source of a major recall of dozens of popular children's medications earlier this year.
Shares of Procter & Gamble rose after the consumer products maker reaffirmed its forecast that sales from existing operations would rise by 4 to 6 percent next year.
Stocks initially slipped after a report that manufacturing grew much more than expected in the Mid-Atlantic region during December. The Philadelphia Federal Reserve Bank's business activity index rose to 24.3 in December, after rising to 22.5 the month before.
Traders may initially have been skittish after learning prices in the region surged and the employment index fell. But Jim Paulsen, strategist at Wells Capital Management in Minneapolis, told CNBC.com the report overall had only good news.
Price increases during a period of economic recovery aren't surprising, Paulsen said. Moreover, while the index for employment fell to 5 in December from 13.3 in November, the average work week went from 10.9 in November to 19.3 in December, nearly a record, he said.
"If you put those two together you get income generation," Paulsen said. "It's hard not to look at this report and say, 'wow it was good.' Everything looks fairly good and by a long shot it was better than expectations."
One issue for stocks is whether they can keep gaining as bond yields rise, providing an attractive alterantive to equities, Brian Battle vice president of trading at the Chicago-based Performance Trust Capital Partners told CNBC.com.
Stocks, at some point, "will have to give up some of their gains," he said. (Read more: When Will Rising Rates Sting Stocks?)
In fact, bond yields rose more on Thursday, as prices fell, with the benchmark 10-year Treasury note yielding 3.5 percent.
The dollar was flat after rising earlier on the economic news against a basket of currencies. Gold, meanwhile, sank to $1,370 an ounce.
Elsewhere in economic news, initial claims for unemploymentdropped 3,000 for the week ended Dec. 11 to 420,000 from a revised upward 423,000 level the week before. Economists surveyed by Reuters expect claims to fall by 1,000 to 420,000, down from 421,000 last week. Continuing claims, however, rose to 4.14 million in the week ended December 4, exceeding an estimate of 4.07 by analysts surveyed by Reuters.
Housing starts, rose 3.9 percent to a seasonally adjusted annual rate of 555,000 units, slightly more than expected, but permits for new housing disappointed, slipped 4 percent, the Commerce Department reported Thursday. The drop in permits led to a 1 1/2 year low.
In Europe, stocks ended higher, as food and beverage stocks rose after positive results from Danisco, a Danish maker of food ingredients, although investors remain worried about euro zone debt difficulties.
Meanwhile, Moody's Investors Service put Greece's credit rating on review for a possible downgradeon Thursday. The rating agency is concerned about the country's ability to cut debt to sustainable levels, althoug hit acknowledged Greece has made "significant" progress in fiscal consolidation.
On Tap This Week:
THURSDAY: Earnings from Oracle, Accenture, Research In Motion, and Take-Two.
FRIDAY: Leading indicators, quadruple witching.
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