Stocks rise for third straight day; S&P tops 1400

NEW YORK -- Doomsayers be damned. The U.S. stock market is on the rise again and flirting with fresh highs for 2012 — a year in which looming risks have dominated headlines and overshadowed the double-digit returns in stocks.

The Standard & Poor's 500 stock index gained 7.12 points, or 0.5% on Tuesday, finishing at 1401.35, its first close above the key 1400 level since early May. The benchmark index, which is home to America's largest companies, extended its gains to 11.4% for the year and is 1.25% below its April 2 high of 1419.04.

The Dow Jones industrial average is also within 111 points of its 2012 high after it rallied 51.09 points, or 0.4%, Tuesday to finish at 13,168.60.

Fueling the turnaround has been a string of market-friendly news. Friday's government report showed a better-than-expected 160,000 jobs were created last month and revived hopes that the economy would reaccelerate after a patch of slowing growth. A recent pledge from the head of the European Central Bank to take the needed steps to keep the euro intact despite the European debt crisis has also been a positive catalyst.

Adding to the bullish tone is a growing belief among investors that the Federal Reserve will take aggressive steps to stimulate business activity if growth remains sluggish.

Quincy Krosby, a market strategist at Prudential Financial, says stocks' sudden burst to the upside is a combination of investors' anticipation of more Fed-driven stimulus and a diminishing diet of Armaggedon-like headlines out of Europe. Even though neither the Fed, led by chairman Ben Bernanke, or the ECB, headed by Mario Draghi, announced a fresh round of stimulus programs last week as investors had hoped, investors remain confident central bankers will deliver on their promises.

"The Fed's basic message is, 'Not to worry, we will be there if the economic data does not improve,'" says Krosby. "The problems in Europe have not gone away, but we are in remission at the moment in terms of negative headlines."

Also driving stocks higher: Cautious investors are realizing that they have too little money invested in stocks and are starting to shift money from bonds to stocks to catch up. "Everyone flocked to the safety of bonds," says Price Headley, founder of investment website BigTrends.com. "And now many people are underinvested in stocks."

But for the rally to stick and gain real legs, Wall Street would like to see:

• A breakout above key levels. The S&P 500 is back above 1400 and nearing its April bull market high. The Nasdaq has taken out 3000. And the Dow is solidly above 13,000.

"Those are big round numbers," says Headley. "If stocks can push through those levels, (the market) can move up quickly."

• A shift from defensive to offensive stocks. Stodgy dividend-paying sectors such as telecom services, health care and consumer staples have been leading the market since the start of June. A more bullish sign would be if stocks whose success is more tied to an improving economy, such as technology names, small-cap stocks and transportation companies, start to lead the rally.

"That would provide a clearer signal that the economy was moving out of its recent soft patch," says Krosby.