Stocks added to an already strong session following an auction on seven-year Treasury notes that heightened a sense of economic optimism.
Investors were encouraged with the decent demand for today's $24 billion, seven-year U.S. debt auction after a weak auction the day before.
The Dow industrials briefly hit a 2 percent gain and the Nasdaq added to torrid gains as bulls plowed into consumer stocks and industrials.
Economic news still painted a bleak picture of the economy but came in better than expected.
The final reading on fourth-quarter GDP showed the economy shrank at a 6.3 percent rate, but that was better than the 6.2-percent pace expected. And jobless claims posted a small rise last week.
"Obviously the tide is shifting. We've gone from every piece of news being incrementally bad to not as bad as expectations," Stephanie Giroux, Chief Investment Strategist at TD Ameritrade told Reuters. "The fact that collectively we are starting to see things less negative is very significant."
Homebuilders rocketed higher as mortgage rates dropped to their lowest level ever. Interest rates on 30-year fixed mortgages fell to a record 4.85 percentin the week ending today, Freddie Mac reported.
Hovnanian and Beazer Homes were up more than 10 percent.
General Motors was the biggest percentage gainer on the Dow amid anticipation that the Obama administration's auto task force is preparing to approve a round of loans for the big automakers that will avert bankruptcy.
General Electricwas among the most actively traded for the day, gaining as the conglomerate and CNBC parent looked to assure investors that it is addressing problems with its financing unit.
Citigroup was the biggest percentage decliner on the Dow, followed by Bank of America and JPMorgan , though financials pared losses after the auction.
Testimony from Treasury Secretary Tim Geithner before the House Financial Services Committee had little effect on the market. Geithner outlined an expansion of federal oversighton the financial markets. Stocks traded in a tight range during the morning an investors appeared to be unfazed by the Geithner testimony.
The SEC is close to reinstituting the uptick rule for trading. The rule prohibits short-selling stocks until after they have a move higher and is regarded as a stop-gap against trader assaults on particular companies. Financials have been particularly hard hit by short selling and are expected to benefit from the rule.
And, as U.S. employees of AIG start returning some or all of their bonus payments that have generated so much outrage, it was a much different story in Europe. Executives there said returning their bonuses amounts to "blackmail" and some have even threatened they would resign.
In another sign that the global flight from risky assets has continued, Man Group, the world's largest listed hedge fund firm, said funds under management fell 11 percent from end-December to $47.7 billion, down, as clients pulled out assets in the face of falling markets.
Techs turned in a strong showing, helping the Nasdaq outperform both the Dow and S&P.
American depositary shares of Research in Motion were among the biggest gainers on the Nasdaq after Goldman Sachs backed its "buy" rating on the stock, expecting the BlackBerry maker to hit its fourth-quarter earnings target, and as the company is planning to launch a full-length television service for the BlackBerry platform.
Intel also gained nearly 5 percent as investors seemed to applaud IBM's rumored acquisition of Sun Microsystems, at least for its impact on Intel. The company supplies servers for both IBM and Sun.
Other chip stocks also posted solid gains, with AMD and Micron Technology each up about 10 percent.
Retailers also enjoyed robust gains, with Macy's up nearly 10 percent and Sears , which has under fire since a downgrade from Moody's earlier this week, up more than 5 percent.
Electronics retailer Best Buy also helped create momentum after reporting earnings that beat analyst expectations. Its shares jumped more than 10 percent.
In other earnings, ConAgra reported falling profits but not as much as Wall Street had expected, sending shares higher as the company reaffirmed its 2009 earnings forecast.
And shares surged for Dr. Pepper Snapple Group as the soft drink maker posted earnings of 39 cents a share, slightly ahead of Wall Street estimates even as the company forecast weakening demand for its high-end brands.
Market breadth was increasingly positive, with gainers beating losers 3 to 1 as about 635 million shares changed hands on the New York Stock Exchange by 12:30 pm. There were nine new highs and no new lows.
Still to Come:
FRIDAY: Personal income/spending; Consumer confidence; Obama meets with bankers
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