Stocks pushed higher on Tuesday afternoon as investors were cautiously optimistic that the U.S. Federal Reserve will offer more economic stimulus and that Greek debt talks were progressing.
The broad-based rally included economically sensitive financial and commodity shares, though defensive sectors such as utilities, telecommunications and health care were up closer to 2 percent, leading the way higher.
It's a combination of expectations for something positive to come from the Fed and also Europe's ability to withstand the continued negative concerns about sovereign debt, said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles.
At the Fed's two-day meeting that started Tuesday, the central bank is expected to try to push already low long-term interest rates even lower by tilting toward longer-duration bonds in its portfolio, a move known as Operation Twist. For details, see [nFEDAHEAD]
Meanwhile, U.S. markets also took their cue from buoyant European dividend-paying shares, which showed resilience after the initial shock of Standard & Poor's downgrade of Italy's credit rating. Investors took comfort from news in the previous session that Greece was close to a new deal with the troika of international lenders -- the European Union, the European Central Bank and the International Monetary Fund.
Market players warned that the rally could be short-lived as investors typically buy the rumor and sell the fact, and may be tempted to take profits on Wednesday after a strong performance all last week.
The Dow Jones industrial average <.DJI> climbed 125.83 points, or 1.10 percent, to 11,526.84. The Standard & Poor's 500 Index <.SPX> gained 13.62 points, or 1.13 percent, to 1,217.71. The Nasdaq Composite Index <.IXIC> rose 18.28 points, or 0.70 percent, to 2,631.11.
Technical indicators, however, pointed to a positive risk on tone over the next week. Recent indicators, including the strikingly low number of stocks trading above their 10-week moving averages indicate heavily oversold conditions, said Ron Meisels, technical analyst and president of Phases & Cycles in Montreal.
Meisels is looking for the year to end on stronger ground, but for that to happen, he said the S&P 500 needs to hold above 1,125 to avoid the risk of a sell-off close to 1,000. Before then, he noted the market is vulnerable to another trough in early October, which would mark a 105-day cycle low.
Among technology stocks, International Business Machines
Data that showed U.S. housing starts declined more than expected in August failed to catch much attention from the market.
(Reporting by Claire Sibonney; Editing by Jan Paschal)