The Dow and the S&P 500 rose slightly on Tuesday, led by gains in retail stocks after strong results from Home Depot , the world's largest home improvement company.
Wall Street made a sharp turnaround about an hour into trading, on rumors that Spain may be close to asking for a sovereign bailout, which traders say may have increased buying.
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"So now we are really seeing the rumor mill getting a bid under risk assets," said David Lutz, managing director at Stifel Nicolaus, in Baltimore.
Lutz added that the U.S. dollar has come off sharply, while yields on Spanish bonds continued to tighten. European financial shares turned higher, also prompting a turnaround in U.S. finiancial stocks, which had declined earlier.
Dow component Home Depot Inc was the S&P 500's top gainer, climbing 4.3 percent to $63.81 after the retailer reported earnings that beat expectations and raised its outlook. Shares of TJX Cos shot up 2.8 percent to $42.10 after the company, which owns the Marshalls and T.J. Maxx discount chains, reported a quarterly profit that beat analysts' expectations by 1 penny a share. The S&P retail sector index advanced 1.4 percent.
Energy stocks, which were trading lower earlier, also turned around sharply. The S&P 500 energy sector index rose 0.5 percent.
Technology shares slipped, with an S&P technology index down 0.2 percent. The tech sector came under pressure from weakness in Microsoft after the executive most widely tipped to be the next CEO left the company. [ID:nL1E8MD0DR] Microsoft's stock slid 3 percent to $27.15.
The Dow Jones industrial average was up 19.36 points, or 0.15 percent, at 12,834.44. The Standard & Poor's 500 Index was up 2.31 points, or 0.17 percent, at 1,382.34. The Nasdaq Composite Index was down 7.28 points, or 0.25 percent, at 2,896.98.
But the gains were seen limited as the euro zone's debt crisis continued to roil global markets.
"I don't think that's going to be enough to cause a turnaround in the market and make up all the losses we've made in the past four or five trading sessions. I'm not convinced the rally has legs right here," said Bucky Hellwig, senior vice president of BB&T Wealth Management in Birmingham, Alabama.
The S&P 500 was still down nearly 2 percent for the month on lingering concerns about the "fiscal cliff" in the United States, and the debt crisis in the euro zone.
The fiscal cliff is a series of budget cuts and tax hikes that begin to take effect in the new year. Market participants worry that if no deal is reached to avoid going over the cliff, the economy could fall back into recession.
Concerns over this possibility contributed to the S&P 500's worst week since early June last week, with no sign of a bottom despite a drop of almost 3 percent over the past two weeks.
"The attention in the equity markets has shifted more noticeably to the possibility that the U.S. fails to properly handle the so-called fiscal cliff," said Ari Wald, an analyst at PrinceRidge Group, in New York.
Wald said equities in developed countries have been outperforming U.S. stocks despite worries about the euro zone's financial health.
In other earnings news, AK Steel Holding Corp shares fell 14.3 percent to $4.68 after forecasting a fourth-quarter loss.
In contrast, shares of Michael Kors Holdings gained 0.5 percent to $50.84 after the fashion designer's company raised its outlook.
(Additional reporting by Ed Krudy and Leah Schnurr; Editing by Kenneth Barry and Jan Paschal)