Stocks rose on Tuesday on news that Italian Prime Minister Silvio Berlusconi would resign.
Italy's president said Berlusconi will resign after a new budget law is approved.
The market is up because at least one half of the battle is done, but we still have the other half left. We still need to find out how he will be replaced, said Jack DeGan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
The better scenario (for the market) would be adopting a non-political caretaker government because elections, which would be the other alternative, take longer and it's a process with an unknown outcome.
Trading had been choppy for most of the day after Berlusconi won a vote on the ratification of the budget, but he failed to obtain an absolute majority in the Chamber of Deputies, leading to calls for him to step down.
The Dow Jones industrial average <.DJI> rose 54.34 points, or 0.45 percent, to 12,122.73. The Standard & Poor's 500 Index <.SPX> added 9.13 points, or 0.72 percent, to 1,270.25. The Nasdaq Composite Index <.IXIC> gained 25.90 points, or 0.96 percent, to 2,721.15.
The PHLX Europe sector index <.XEX>, which includes major European shares, advanced 1.3 percent.
The CBOE Volatility Index or VIX <.VIX>, Wall Street's so-called fear gauge, fell more than 4 percent to 28.62.
With little on the U.S. economic calendar this week and earnings season drawing to a close, investors' attention was fixed on Europe. According to Thomson Reuters data, among the 442 S&P 500 companies that have reported earnings so far, 70 percent topped expectations.
U.S. markets have been closely tied to the fortunes of the euro while volatility has been tethered to sovereign debt. The euro hit a session high against the dollar ahead of the Italian vote.
In corporate news, an experimental antidepressant from AstraZeneca Plc and Targacept Inc failed to meet the goal of changing a key depression rating score in the first of a series of pivotal clinical trials. Targacept shares plunged 58 percent to $8.01 after the news.
Rockwell Automation Inc's quarterly profit and 2012 outlook beat analysts' estimates, sending its shares up 7.1 percent to $74.77.
(Reporting by Angela Moon; Editing by Jan Paschal)