Investors slowed their move into the market from a sprint to a walk.
Stocks tacked on modest gains Tuesday to extend a rally to a fourth day following a strong rise in pending home sales, the latest encouraging signal for the troubled housing market.
The Dow Jones industrial average briefly pushed into the black for 2009 but ended 35.5 points below the break-even mark. In March, the blue chips were down 25.4% for the year.
A slump in financial shares kept overall buying in check as several big banks said they would sell more stock to repay federal bailout money. The modest moves followed huge gains on Monday, when indicators jumped more than 2% on positive signs for manufacturing and other good economic signals.
The main driver of stock gains was a report showing the biggest jump in nearly eight years in pending home sales for April, however some market watchers worried that the sudden gains since last week may be overdone.
"The fear is that we're unable to tell whether we have green shoots sprouting or weeds popping up through cracks in the concrete," said Lawrence Creatura, portfolio manager at Federated Investors in Rochester, N.Y. He was referring to early positive signs in the economy that Federal Reserve Chairman Ben Bernanke has called "green shoots."
The Dow rose 19.43, or 0.2%, to 8,740.87. The Dow at times traded above 8,776.39, its finish for 2008. While it remains down moderately for the year, the Dow is up 5.3% in four days, a gain that could otherwise take months to achieve.
The broader Standard & Poor's 500 index rose 1.87, or 0.2%, to 944.74, and the Nasdaq composite index rose 8.12, or 0.4%, to 1,836.80. Both indexes are up for 2009.
Financial stocks mostly lost ground as several banks said they would sell shares to raise capital. Adding to their share base can dilute the value of existing shares.
Morgan Stanley said it will raise $2.2 billion in common stock offering, after JPMorgan Chase. and American Express announced similar plans late Monday. JPMorgan will offer $5 billion of common stock, while American Express is seeking to raise $500 million.
Morgan Stanley rose 20 cents to $30.09, while JPMorgan fell $1.61, or 4.5%, to $34.50. American Express slid $1.28, or 4.9%, to $24.71.
Meanwhile, Goldman Sachs Group has sold part of its stake in Industrial & Commercial Bank of China to raise more than $1.9 billion to help repay bailout money. Goldman fell $1.20 to $143.13.
"We've seen a drumbeat of new issuance in the banking sector. So far, the market has been able to absorb the supply pretty well. It's going to be yet another test," said Craig Peckham analyst at Jefferies & Co.
Banks that want to repay bailout funds but weren't required by the government to raise additional capital must first prove they can raise money without relying on guarantees against losses provided by the Federal Deposit Insurance Corp.
Investors drew some confidence from auto sales reports following the bankruptcies by Chrysler and General Motors after GM formally filed for Chapter 11 protection Monday.
GM said its U.S. sales fell 30% in May from a year ago but were 11% better than in April. Ford said its U.S. sales fell 24% from a year earlier but were up 20% from April. Chrysler's U.S. sales fell 46.9%, as the company wrapped up its first month under bankruptcy protection.
Ford shares rose 28 cents, or 4.6%, to $6.41. GM shares no longer trade on the New York Stock Exchange and Chrysler isn't public.
Investors have been encouraged this spring by data suggesting the economy's slide is slowing, sending major stock indicators up 30% to 40% from the 12-year lows they hit in early March. The market has been able to look past unsettling but widely expected events such as the bankruptcies of Chrysler and GM, as well as dismal reports on the labor market.
Market analysts warn that some pullback is likely in order for the market to maintain solid, sustainable gains. Straight-line advances tend to worry stock watchers as signs of indiscriminate buying that could quickly evaporate at the first sign of trouble.
William Rutherford, president of Rutherford Investment Management in Portland, Ore., said the report on pending home sales is encouraging because a rebound in home prices is necessary for the economy to recover. But he also thinks investors are reading too much into modest signs of improvement.
"The economy has to recover nicely to justify the recent run-up and I don't know whether it's got that much momentum in it," he said.
This week investors will be closely watching a stream of economic reports — particularly the monthly jobs data on Friday — for more signals on where to take the market next.
In technology news, data storage company EMC offered late Monday to buy Data Domain for $1.8 billion, or $30 per share. The all-cash offer came less than two weeks after NetApp made its own bid for the company at $25 a share.
Data Domain jumped $5.23, or 19.9%, to $31.58, while EMC rose 43 cents, or 3.5%, to $12.85. NetApp fell $1.35, or 6.5%, to $19.34.
The report on pending home sales lifted home builder stocks. Beazer Homes USA rose 24 cents, or 9.1%, to $2.87, while Toll Brothers rose 73 cents, or 3.9%, to $19.53.
About three stocks rose for every two that fell on the NYSE, where volume came to a light 1.41 billion shares compared with 1.5 billion shares Monday.
The Russell 2000 index of smaller companies rose 5.30, or 1%, to 526.63.
Interest rates on long-term Treasurys fell after jumping back and approaching last week's highs on Monday.
The yield on the 10-year Treasury note, which is used as a benchmark for home mortgages and other consumer loans, fell to 3.62% from 3.68% late Monday. Investors have been mindful in recent weeks of how rising yields could hamper an economic recovery by driving up interest rates.
The dollar was mixed against other major currencies, while gold prices rose.
Light, sweet crude fell 3 cents to settle at $68.55 on the New York Mercantile Exchange after finishing at its highest level of the year on Monday. Oil briefly rose to $69.05 Tuesday afternoon, a price not seen since early November.
Overseas, Britain's FTSE 100 fell 0.7%, Germany's DAX index rose less than 0.1%, and France's CAC-40 slipped less than 0.1%. Japan's Nikkei stock average rose 0.3%.