The Dow popped about 40 points after the Federal Reserve issued its rate decision -- a collective sigh of relief -- then relaxed back to its pre-Fed level.
A drop in oil prices and better-than-expected economic reports also helped prop up the market.
The Fed left its target for the federal-funds rate at 2 percent and voiced greater concern about inflation but didn't indicate that it would soon start raising rates.
"Nothing within the statement indicates an imminent rate hike, but the statement represents the second step along the path to an eventual rate hike," Tony Crescenzi of Miller Tabak wrote in a note following the Fed decision. The first step was the Fed's April 30th indication that it would stop cutting interest rates, Crescenzi said and the third step will be a statement or major speech that hints at a rate hike. Therefore, Crescenzi deduces that the earliest a rate cut would likely come would be the Sept. 16 meeting, and even then it's somewhat unlikely.
The Fed has its hands tied by weakness in the U.S. market and it cannot raise the rates to keep a lid on inflation, and monetary policy would not be of use in face of commodity-price rises, some analysts said.
Keeping rates steady is about the only strategy the central bank has to control inflation generated primarily by skyrocketing oil prices, while also tending to an economy teetering on the brink of recession, Doug Elmendorf, a senior fellow at the Brookings Institution, said.
Financials continued a rally started in the prior session, with a lot of the big brokerages up 1-2 percent and the regional banks up more than that.
Light, sweet crude was trading betwen $134 and $135 a barrel. Earlier, theEIA reported an 800,000-barrel build in crude inventories; economists had expected a 1.4-million-barrel draw.
New-home sales fell 2.5 percent in May to an annual rate of 512,000 units, after a 4.8 percent advance in April. It was the fifth decline in the past six months but better than the 510,000 pace economists had expected. In annual terms, home sales are down more than 40 percent. Inventories rose to a 10.9-month supply.
Earlier, a report showed mortgage applications fell for a second straight week, hitting their lowest level since December 2001 even as interest rates fell.
Orders for durable goods, which are items that are meant to last three years or more such as appliances and cars, were unchanged in May. April was revised to show a 1-percent drop, more severe than the 0.6-percent slide previously reported. Demand for nondefense capital goods excluding aircraft, which is a closely watched gauge of business spending, fell by 0.8 percent last month.
Lehman Brothers advanced after the company said it was rehiring two executives who had left in 2007 for unspecified reasons.
Lehman said it was hiring Michael Gelband, who resigned last year as global head of fixed income, to the newly created post of global head of capital markets. It also rehired Alex Kirk, co-chief operating officer for the fixed income division, until 2007.
"Right now what you have is a trading rotational market here -- you find something that goes down, buy the dip," Gordon Charlop of Rosenblatt Securities told CNBC, citing financials and Monsanto as examples. But, t hat doesn't mean the market is going to follow suit, Charlop added.
"This is a good market for a trader, but I don't think it's taking off anytime soon," Charlop said.
Expectations had been for a better second quarter but that's not materializing and Charlop expects that energy concerns are actually going to pick up in the second half.
"I'm not convinced that we're going to start to see sentiment change in any dramatic fashion," he said.
Monsanto declined as traders had been bidding up the biotech firm ahead of earnings and then sold off as soon as the earnings report hit. The agriculture-products maker delivered higher-than-expected earnings and raised its full-year forecast, citing strong sales of herbicides and specialty seeds.
General Mills shares fell after the company, which makes everything from Cheerios cereal to Yoplait yogurt and Progresso soup, reported its profit fell 17 percentand that higher grain and energy prcies would drive up costs by about 9 percent this fiscal year.
ADRs of Research In Motion skidded ahead of earnings from the BlackBerry maker, due out after the closing bell. Revenue and earnings are expected to be more than double thosefrom a year earlier. The stock is up nearly 70 percent since early February and analysts say it may have further to go.
Elsewhere in tech, AT&T shares jumped after Sanford Bernstein raised its rating on the stock to "outperform" from "market perform."
Shares of American Express slipped. The credit-card provider reached a settlement with MasterCard. MasterCard will pay AmEx up to $1.8 billion to settle a dispute that MasterCard and Visa blocked banks from issuing AmEx cards. MasterCard will make payments of $150 million beginning in the third quarter, which AmEx said will help given the weakening economy and bleak outlook for consumer spending.
AmEx has already reached a settlement with Visa for as much as $2.25 billion.
More bad news for Countrywide Financial : The Illinois attorney general's office plans to sue the mortgage lender and Chief Executive Angelo Mozilo, claiming it engaged in deceptive trade practices, Reuters reported.
Boeing was the biggest decliner on the Dow, sliding more than 4 percent, after Goldman Sachs downgraded the stock to "sell" from "neutral," citing weakness in the economy and rising fuel prices.
"There is more risk to the 787 program than is currently priced in as the program has yet to even enter flight test, where historically most issues on development aircraft are found," Goldman said in a note to clients.
Still to Come:
WEDNESDAY: Weekly crude inventories; Fed rate decision; Earnings from General Mills, Monsanto, Bed, Bath & Beyond, Nike, Oracle and RIM
THURSDAY: Jobless claims; GDP (final) with corporate profits; existing-home sales; Kansas City and Chicago Fed reports; ConAgra, Lennar earnings
FRIDAY: Personal income and spending; consumer sentiment; KB Home earnings
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