Stocks rose as a series of strong earnings reports, coupled with M&A activity, lifted market sentiment.
The Dow Jones Industrial Average rose more than 40 points after closing slightly loweron Monday.
JPMorgan , American Express , and General Electric led blue chips higher, while 3M and Merck slipped.
The S&P 500 broke through resistance levels to trade above 1,250. The Nasdaq also gained. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 16.
The market is heading into end of the year on a strong note. The Dow is up about 4.3 percent for December and 10.1 percent for the year-to-date. For the month, the S&P 500 rose 5.6 percent, while it was up 11.8 percent for the year-to-date. The Nasdaq was up 6.1 percent for December, and 16.8 percent for the year-to-date.
Most key S&P 500 sectors gained on Tuesdsay, led by financials, materials and industrials. Consumer staples and healthcare fell.
Low volumes and a lack of driving economic news could bring volatility in the near term, according to Andrew Kanaly, chairman of Kanaly Trust Company.
"You might be looking for a little selloff here before you jump in completely into this little rally we’ve got on the year end," Kanaly told CNBC.
In a note to clients, Jim O'Neill, chairman of Goldman Sachs Asset Management, declares 2011 the year the U.S. will return to "normal."Stocks will keep rising, probably another 20 percent, O'Neill wrote, and bond yields will rise as well, although perhaps shy of 5 percent, which he predicted before. O'Neill also expects the dollar could rally, although "US policymakers will be eager to resist a significant increase."
Shares of AIG rose after news the U.S. Treasury plans to sell a big stake in the insurer in two stock offeringsnext year, according to Reuters. Any remaining stocks will be sold in 2012.
AIG received $182.3 billion in money from the federal government during the financial crisis.
In deal news, Toronto-Dominion Bankagreed to buy Chrysler Financialfrom private equity firm Cerberus Capital Management for $6.3 billion. The purchase, which will make TD one of the top five bank-owned auto lenders in North America, won't affect 2011 earnings, and will add about $100 million to adjusted 2012 earnings, TD Bank said.
Also, Alpha Natural Resources made an offer to buy rival coal company Massey Energy , according to the Wall Street Journal. Both stocks traded higher Tuesday.
And Dutch group DSM plans to buy vitamin-maker Martek Biosciencesfor $1.1 billion.
Shares of Adobe Systems gained after the computer-software maker posted better-than-expected earnings Monday.
Jabil Circuit jumped more than 6 percent after reporting first quarter earnings nearly quadrapuled, results better than expected by the circuit board provider. And And PayChex rose on a surprising boost in fiscal second quarter earnings.
But Darden Restaurants fell after the company issued guidance that missed forecasts. ConAgra Foods, meanwhile,fell slightly after releasing disappointing fiscal second quarter profitsand confirming low single-digit earnings growth rate for fiscal 2011.
Car Max shares also fell despite reports profits and sales above expectations on strong sales of used cars. The stock had been trading at an historic high.
Carnival shares rose after reporting fiscal fourth-quarter earnings rose 29 percent, more than expected, as demand continued to rise.
In other news, Toyota agreed to pay the U.S. government $32.4 million to settle an investigation in the wake of two recalls over accelerator pedals and steering relay rods.
The Securities and Exchange Commission is investigating the resignation of Hewlett-Packard's ex-CEO Mark Hurd, according to The Wall Street Journal.
And 3M denied reportsthat its top executive, George Buckley, was preparing to leave the company before his contract expired in early 2012.
Wall Street Strategies downgraded Pacific Sunwear to "sell" from "hold," and Urban Outfitters to "hold" from "buy," sending shares of the teen retailers down. The brokerage also lowered Urban Outfitter's price target to $36 a share from $43.
New York Attorney General Andrew Cuomo filed a lawsuit against Ernst & Young for civil fraud Tuesday, the Wall Street Journal reported. Cuomo accused the accounting firm of helping Lehman Brothers make its "Repo 105" transactions seem less risky than the really were.
The dollar slipped slightly against a basket of currencies, as the euro rose modestly.
European shares rose, boosted by miners. Concerns over the euro zone debt crisis continued after Moody's warned it may downgrade Portugal's debt rating.
China voiced its concern over the state of European debt and urged more action to stem the problems. Asian stocks ended higher across the board as geopolitical tensions in Korea eased.
On the Calendar This Week:
TUESDAY: FCC votes on net neutrality; earnings from Nike.
WEDNESDAY: MBA mortgage applications, GDP, existing home sales, oil inventories; before-the-ell earnings from Walgreen; after-the-bell earnings from Bed, Bath & Beyond.
THURSDAY: NYSE early close; durable goods orders, personal income and spending, weekly jobless claims, consumer sentiment, new home sales.
FRIDAY: Markets closed for Christmas.
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