Stocks gained some strength in the final hour of trading, but remained mixed after news the Federal Reserve didn't believe the economy had improved enough by December to alter its economic stimulus program.
The Dow Jones Industrial Average turned positive, rising more than 15 points, after the Federal Reserve's December policy-setting minutes were released.
Tuesday's lackluster session follows a day after upbeat news on manufacturing across the world encouraged investors to get the new year off to a strong start. All the major indexes closed Monday at multi-year highs.
Alcoa and Disney led blue-chips higher, while McDonald's and Coca Cola declined.
The S&P 500 and the Nasdaq remained down, but off the lows of the session. The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell below 18.
Among key S&P sectors, energy, materials and consumer discretionary fell,while telecom rose.
At the Dec. 14 Federal Open Market Committee meeting, central bank officials believed the economic recovery hadn't gained enough strength to warrant a change in the Fed's $600 billion bond-buying program.
If the Fed didn't have enough evidence of a turnaround in the economy to change its stimulus program in December, they probably won't see enough evidence in coming months, Todd Schoenberger, managing director at LandColt Trading told CNBC.com.
That's because, while the economy is improving, headwinds remain, including rising gas prices, still anemic job growth, Schoenberger said.
"The Fed is not going to have evidence that’s going to help them to trim back on that $600B," he said. "That’s good news for stocks—the market wants QE2," he added, referring to the second round of quantitative easing, the name given to the Fed's gradual purchases of long-term bonds.
A deal between Qualcomm and Atheros Communications , a semiconductor manufacturer, could be announced later this week for $45 a share, or $3.5 billion, according to the New York Times, citing "two people with direct knowledge of the talks."
Ford traded mostly flat even after the automaker reported its U.S. sales for December rose 6.7 percent from a year earlier, and 30 percent more than November levels.
General Motors gained after the automaker reported sales rose 7.5 percent from the same month last year, its best showing for last year. GM began trading on the New York Stock Exchange in mid-November. Meanwhile, RBC started coverage on GM with an "outperform" rating and a $42 price target.
Chrysler's sales, meanwhile, rose 16.4 percent in December from the same time in 2009, while the automaker's sales rose 17 percent for the year.
Toyota's sales, however, fell 5.5 percent in December from the same month a year ago. But Nissan's sales rose 28 percent in December from a year earlier.
Overall, December auto sales were expected to reach 12.3 million, according to economists surveyed by Reuters.
Commodities sold off as investors took profits and moved into riskier assets. The Reuters-Jefferies CRB index fell more than 1.5 percent.
Oil prices sank,closing down 2.37 percent, at $89.39 a barrel, after trading near 27-month highs in a volatile session as investors took profits.
Energy stocks fell, led by Anadarko Petroleum and Nabors Industries.ConocoPhilips and Chevron also declined.
Shares of BP jumped following newspaper reports that rival oil major Royal Dutch Shell was considering buying the troubled firm.
Gold also fell sharply to $1,378.50 on profit taking and as investors moved into riskier assets such as stocks. Freeport-McMoran declined more than 2 percent, and Fronteer Development tumbled more than 5 percent, despite being added to RBC's best ideas portfolio.
Materials also suffered after UBS cut its stock-investment ratings on Vulcan Materials and Martin Marietta Materials to "neutral" from "buy."
Meanwhile, severe floods in north-east Australia decimated an area that produces coking coal used in steel making. Coal stocks, including Peabody Energy , Puda Coal and Massey Energy took a plunge following the news.
But Alcoa continued to surge a week ahead of its earnings release, and a day after Deutsche Bank raised the aluminum producer to "buy" from "hold."
The commodities selloff, as well as signs of U.S. economic growth, appeared to boost the dollar, which rose against a basket of currencies.
Motorolasplit into two companies and began trading today. Motorola Mobility, which makes cell phone and cable set-top boxes, rose more than 6 percent at the outset, while Motorola Solutions, which sells police police radios and barcode scanners to government agencies and large companies, rose slightly.
In other news, the Pentagon faces cuts and savings of $100 billion, sources told Reuters. The U.S. Defense Secretary Robert Gates is expected to announce the cost-cutting measures this week.
Borders sank further after news the bookstore chain's general counsel and chief information officer resigned. The departures came in the wake of Borders' disclosure it would delay payment to vendors.
Chain store sales are scheduled to be reported on Wednesday and Thursday, and are expected to show a 3.3 percent gainin December, marking a strong end to the holiday shopping season. But analysts were divided as to whether consumers will continue to shop now that the holidays are over.
Overall, retailers were largely lower Tuesday, but Polo Ralph Lauren shares gained after the luxury apparel maker was raised to "buy" from "hold" by Citigroup.
Supervalu shares slid after Morgan Stanley cut its rating on the grocer to "underweight" from "equalweight." Rival grocery chains also dropped including Safeway and Whole Foods .
Shares of J.M. Smucker fell sharply after Sanford Bernstein cut the maker of jams and ice-cream toppings to "underperform" from "market perform."
In the day's economic news, November factory orders jumped 0.7 percent, more than expected, and up from a 0.9 percent decline in October, according to the Commerce Department. Economists surveyed by Reuters had expected factory orders to fall 0.1 percent.
European stocks closed mostly higher as the FTSE-100 surged ahead of the other major indexes.
On the Calendar This Week:
TUESDAY: Earnings from Mosaic.
WEDNESDAY: MBA mortgage applications, Challenger job-cut report, ADP employment report, ISM non-manufacturing index, oil inventories; earnings from Family Dollar. Kansas City Federal Reserve President Hoenig speaks.
THURSDAY: Chain store sales, Monster employment index, ECB announcement, jobless claims, natural gas inventories, Treasury STRIPS, money supply; earnings from Monsanto.
FRIDAY: Nonfarm payrolls report, consumer credit; Federal Reserve Chairman Bernanke speaks, Federal Reserve Vice Chairman Janet Yellen speaks.
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