Stocks pointed to a higher close Tuesday after a handful of economic data helped boost market confidence and after Fed chairman Ben Bernanke said failure to raise debt ceiling could result in severe market disruption.
The Dow Jones Industrial Average soared, surpassing the 12,000-mark after squeezing out a small gainMonday.
Home Depot , Caterpillar and Boeing led the blue-chip gainers. Cisco was among the laggards after RBC cuts its rating on the tech bellwether to "underperform" from "outperform" and price target to $14 from $22.
The S&P 500 and the tech-heavy Nasdaq also climbed. The CBOE Volatility Index, widely considered the best gauge of fear in the market, tumbled almost 10 percent to trade below 18.
The Dow and Nasdaq are seeing their best gains since Apr. 20, while the S&P is having its best day since Mar. 21.
All key S&P sectors were in the green, led by growth plays energy, industrials and materials.
“The rally has a lot to do with technicals,” according to Alan Valdes, director of floor operations at DME Securities, noting that markets tend to see a bounce ahead of options expiration.
“Bulls are looking for a good reason to buy at depressed levels,” said Michael Gault, senior portfolio strategist for Weiser Capital Management. “The key is whether the rally will be sustained through the end of the day—that’s more telling.”
Bernanke warned that a failure to lift the government's debt ceiling risks a loss of confidence in America's creditworthiness, saying the U.S. could lose its AAA credit rating and the greenback's status as the reserve currency could be damaged.
"Even a short suspension of payments on principal or interest on the Treasury's debt obligations could cause severe disruptions in financial markets and the payments system," Bernanke said at an event sponsored by the Committee for a Responsible Federal Budget.
Stocks tumbledlast week after Bernanke acknowledged the economic slowdownduring a banking conference in Atlanta.
Oil prices gainedas U.S. light, sweet crude rose $2.07 to settle at $99.37 barrel, while London Brent crude climbed $1.06 to settle at $120.16. Gold climbed $8.80 to settle at $1,523.80 an ounce. (Read More: Gold to Reach $5,000 Due to Supply Shortage)
On the tech front, Google advanced after the search-engine giant unveiled new features to accelerate search results and simplify the process for smartphone users.
Intel and Entropic Communications rose after the two tech firms announced a partnership to develop an advanced video gateway.
Appleagreed to settle a long-running row over patentswith Nokia , which would give a boost to the faltering mobile-phone maker's earnings.
Most big financials pared earlier gains, including BofA and Citigroup.
Morgan Stanley fell after RBC started coverage of the bank with an "underperform" rating. And Capital One slipped after news the bank is expected to buy ING Groep's online-banking business.
Meanwhile, JPMorgan ousted its head of home lending, David Lowman.
Avis Budget said it acquired Avis Europe for $1 billion, raising concerns that the car-rental firm will end the bidding war for Dollar Thrifty , which had also received an offer from Hertz .
On the earnings front, Best Buy jumped after the electronics retailer's results beat estimatesand the firm backed its earnings outlook for the year.
GT Solar climbed after the firm boosted its profit and revenue outlook. Other solar stocks were also higher following the news.
Meanwhile, Kellogg slipped after the FDA issued a warning to the cereal producer, saying it found a food contaminant while inspecting one of its plants.
Among the day's economic news, retail sales fell for the first time in 11 months, although the decline was less than expected. Total retail sales slipped 0.2 percent, the Commerce Department reported. Economists expected a decline of 0.4 percent, according to Reuters.
Department stores Nordstrom , Macy's and Saks were trading higher.
JCPenney soared almost 20 percent to lead the S&P 500 after the clothing retailer named former Apple's head of retail operations Ron Johnson as the new CEO.
Meanwhile, the Producer Price Index increased 0.2 percent in May, according to the Labor Department. Excluding the volatile food and energy categories, the core index also increased 0.2 percent.
“Numbers were mostly in line, maybe a little bit better, so the scare is behind us now and we’ve backed into a level where we can find support,” Gordon Charlop of Rosenblatt Securities told CNBC.
Stocks initially soared following news the Chinese central bank raised reserve ratios requirement for banks for the ninth time since last October after data showed inflation rising to its highest level in almost three years.
The report helped boost metals prices, lifting mining and industrial stocks such as Freeport McMoran and Caterpillar .
Analysts said the news suggested a measured slowdown of the Chinese economy and this encouraged investors to go into risky assets. But economist Nouriel Roubini said China is facing a "meaningful probability" of a hard landing.
Also on the economic front, business inventories rose 0.8 percent April, the highest since October 2008, the Commerce Department reported. Economists expected a rise of 0.9 percent, according to Reuters.
European shares closed sharply higher following the positive economic report out of China.
On Tap This Week:
WEDNESDAY: Weekly mortgage apps, CPI, Empire state mfg survey, Treasury international capital, industrial production, housing market index, Geithner testifies before House Financial Services, oil inventories, credit card default rates reported, Dell shareholder mtg, Google Chromebook goes on sale
THURSDAY: Housing sales, jobless claims, current account, Philadelphia Fed survey, Fed's Fisher speaks, money supply; earnings from Kroger, Pier 1 Imports, Smithfield Foods, Research In Motion
FRIDAY: Consumer sentiment, leading indicators, quadruple witching
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