Stocks reversed early losses to finish near session highs Wednesday following positive comments from President Barack Obama and Speaker John Boehner on the "fiscal cliff" issue.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, ended below 16.
All key S&P sectors ended in positive territory, led by consumer discretionary and energy.
"My hope is to get this agreement done before Christmas," said Obama at a White House event addressing middle-class Americans, helping to add further fuel to the rally.
In addition, Boehner said while he is still opposed to raising U.S. income tax rates, Republicans are willing to put revenue on the table if accompanied by spending cuts.
And former White House chief of staff Erskine Bowles said the White House will not insist that tax rates on upper-income Americans increase all the way back to the Clinton-era level, following meetings he had with Obama, Treasury Secretary Tim Geithner and other negotiators.
"It's going to a be headline driven market, but stocks are likely to rally this week," said Todd Schoenberger, managing partner at LandColt Capital, citing seasonal factors following the Thanksgiving week. "And for regular Americans, the fiscal cliff mess won't be a true mess until they see their first paycheck in January."
Stocks flip-flopped in the past two sessions as investors reacted to every headline from lawmakers in Washington. Wall Street lost ground in the last hour of trade on Tuesday after Senate majority leader Harry Reid said there had been little progress in dealing with the issue. (Read More: 'Cliff' Talks Send Stocks on Roller Coaster Ride)
Obama hosted another summit with business leaders at the White House to discuss the country's fiscal problems. Chief executives of Goldman Sachs, American Express and Caterpillar, among others are expected to attend.
"You have an 11-percent gain on the S&P 500 this year—I can sell now and know what my capital gain and income taxes are going to be. But I have no idea what they're going to be in 2013," explained Brian Battle, vice president of trading at Performance Trust Capital Partners. "So I think there's going to be a lot of selling ahead, not for fundamental reasons but for technical reasons."
Meanwhile, the U.S. economy
The Fed's report comes two weeks ahead of the central bank's next policy-setting meeting.
Costco rallied after the wholesale retailer announced a special dividend of $7 per share after reporting better-than-expected sales. Other companies including Las Vegas Sands, Ethan Allen nd CNH also announced special dividends this week alone, ahead of next year's possible tax increase on dividends. (Read More: Do Special Dividends Boost Stocks?)
Microsoft said it sold 40 million Windows 8 licenses in the month since the launch, one of the new co-heads of the unit told Reuters.
Knight Capital surged after electronic market-making firm Getco made a $3.50 a share offer for the troubled trading company. Getco already owns about 31 percent of Knight's outstanding shares. Meanwhile, Virtu Financial submitted a rival bid of "nothing less than $3.00 a share," according to sources.
Among earnings, Green Mountain Coffee Roasters spiked higher after the specialty coffee company
Earlier, stocks tumbled near session lows following nes that new home sales dipped in October to a seasonally adjusted 368,000, according to the Commerce Department. The Commerce Department added that Hurricane Sandy probably had a "minimal" effect on sales activity, and did not affect collection of data.
"The numbers are going to be bumpy," said Battle. "The housing market problem is going to last a long time so one month won't make or break the economy."
Weekly mortgage applications declined last week, while demand for mortgage purchases gained for a fourth-consecutive week, according to the Mortgage Bankers Association.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
THURSDAY: GDP, jobless claims, corporate profits, pending home sales, 7-yr note auction, chain-store sales; Earnings from Kroger, Tiffany, Barnes & Noble
FRIDAY: Personal income & outlays, Chicago PMI, farm prices
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