Stocks edged up on Thursday, with the benchmark S&P 500 closing at a two-year high, a trend investors expect to continue through the rest of the year.

A lot of traders thought the market would have a little bigger bump after breaking a key technical level of 1,228 on the S&P, said Alan Valdes, director of floor trading for DME Securities in New York.

What we have seen today is trading in a small band. They take it up to 1228 (but) they are not really going through it big time and we are seeing some profit-taking going on.

Investors loaded up on bank stocks, which have risen 12.4 percent for the month. Late in the year, winning positions often attract buyers seeking to improve fund performance in a practice known as window dressing. The KBW Bank Index <.BKX> gained 2.2 percent, boosted by a 5.4 percent rise in Bank of America Corp to $12.65.

The Nasdaq finished higher for the seventh straight day and closed at its highest level since December 2007, paced by a 6.8 percent jump in Teva Pharmaceutical Industries to

$52.63 after the drugmaker said it expects its experimental multiple sclerosis pill will win U.S. approval within two years after a clinical trial met its main goal.

Expectations of reduced volatility suggest a steady climb through the rest of the year. The CBOE Volatility Index VIX <.VIX>, a barometer of Wall Street anxiety, fell more than 2 percent to 17.25. The VIX usually moves inversely to the benchmark S&P index.

The VIX closed under 18 for three straight days, and MKM derivatives strategist Jim Strugger said it is considered to be the start of a sustained period below its long-term average of just above 20.

The Dow Jones industrial average <.DJI> dipped 2.42 points, or 0.02 percent, to 11,370.06. The Standard & Poor's 500 Index <.SPX> gained 4.72 points, or 0.38 percent, to 1,233.00. The Nasdaq Composite Index <.IXIC> rose 7.51 points, or 0.29 percent, to 2,616.67.

The Dow was pressured by major manufacturer DuPont after it gave its outlook for 2011. DuPont slipped 1.1 percent to $48.32.

A tentative agreement with congressional Republicans to extend tax breaks announced by President Barack Obama hit opposition from prominent Democrats. Wall Street wants the tax breaks to boost returns and spur growth, but news of the Democratic squabbling failed to rattle investors.

The S&P 500 closed above 1,228, a resistance level that represents the 61.8 percent Fibonacci retracement of the 2007-2009 bear market slide, which has proven difficult for the index to stay above in recent sessions.

A Labor Department report showed first-time claims for jobless benefits fell more than expected last week, which investors saw as positive after last week's disappointing payrolls figures.

After the closing bell, Nasdaq said short interest on the exchange dipped 0.8 percent in the second half of December.

Volume was a light 7.7 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, compared with last year's estimated daily average of 8.63 billion.

Advancing stocks outnumbered declining ones on the NYSE by 1,673 to 1,336, while on the Nasdaq, advancers beat decliners 1,528 to 1,069.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)