Stocks closed slightly higher as a mostly positive start to earnings season was offset by the air quickly coming out of a rally in bank stocks.
Financials surged Monday following a bullish call from noted analyst Meredith Whitney, but the sector was the market's biggest drag on Tuesday even though Goldman Sachs reported earnings that blew past Wall Street's expectations.
Investors were wary after economic data showed larger-than-expected gains in producer prices and retail sales—but both readings came largely on the backs of auto and energy sales. With the two volatile areas stripped out, the numbers reflected anemic consumer growth that has been exacerbated by rising unemployment.
The economic reports triggered expectations of inflation, and at least some of the late-morning pop in stocks was attributed to short-covering.
"All the inflation bonds are acting very well today because it feels like the market is building in some inflationary expectations," said Dave Lutz, managing director of trading for Baltimore-based Stifel Nicolaus.
Still, housing stocks showed surprising resiliency as analysts slowly warm to the group.
Dow component Home Depot gained more than 2 percent and home builder Hovnanian Enterprises moved up more than 5 percent. The SPDR S&P Homebuilders ETF posted solid gains as the market clawed to positive ground.
The iShares Barclays TIPS ETF edged higher though it was off its peak. The fund is up about 5 percent in 2009.
Hotel stocks, including Starwood, helped push the market higher.
"We basically have a consumer reflation trade coming out right now," Lutz said. "This is typical of a short-covering move."
Earnings season kicked into full gear as both Goldman and Dow component Johnson & Johnson posted numbers that surprised to the upside.
Johnson & Johnson reported earnings of $3.2 billion that beat expectations, while also affirming its full-year outlook, sending shares higher.
Goldman shares wavered following the company's earnings report, even though the numbers easily beat analyst estimates. The company reported net income for common shareholders of $2.7 billion, or $4.93 a share, compared with $2.05 billion, or $4.58 a share, in the closest year-earlier quarter.
In the financial sector, the government may help troubled commercial lender CIT Group get back on its feet. CIT shares surged on the news.
Also, Prudential Financial Group gained on an upgrade to "overweight" from JPMorgan.
Crude oil prices eased, also turning flat after being above $60 a barrel at one point.
CNBC.com-parent General Electric was among Dow leaders as the company prepares to report earnings Friday; Travelers and AT&T represented the index's biggest losers.
Investors were waiting for three after-the-bell earnings reports Intel, Altera and KFC, Taco Bell and Pizza Hut parent Yum Brands .
Trading was slow, with about 700 million shares changing hands on the New York Stock Exchange heading into the final half-hour. Despite the flatness of the major indexes, market breadth was positive, with winners beating losers 2 to 1.