"It is possible that a number of program trades from sources of high liquidity are being set to execute at this time every day," said Richard Bove, analyst at Punk Ziegel & Co., in a note.
At the end of the day, investors remained positive about the Federal Reserve's assessment about economic growth on Tuesday, and also cheered Cisco Systems' upbeat earnings outlook.
The Dow Jones Industrial Average closed 153.6 points higher, at 13,657.9, with 23 of its 30 stocks on the rise, led by General Motors Corp. , which advanced 4%.
At an analyst meeting in Dearborn, Mich., the automaker's CFO reiterated the automaker's 2007 target for 3 million in retail unit sales, and said GM remains on track to shave costs by $9 billion by the end of the year.
Dow component McDonald's Corp. was up 1.1% after the fast-food giant reported a 6.5% rise in same-store sales for last month.
The S&P 500 closed 20.78 points ahead at 1,497.49, amid a rally by brokerage stocks, including Bear Stearns Cos. , which closed 3.6% ahead after news that the broker had successfully placed more than $2 billion of bonds at yields viewed as not overly onerous.
In another positive sign for investors, high-yield corporate bonds rallied.
"The feeling is the maximum systemic stresses seem to have passed," said Michael Metz, chief investment strategist at Oppenheimer & Co. "Subprime is still with us, but it's not going to bring the whole system down."
The Bear Sterns news is an indication that the "credit spigots opened slightly," said Metz.
The tech-heavy Nasdaq Composite gained 51.38 points to 2,612.98, a gain of 2.01%, with its rise fueled by an upbeat earnings report from networking giant Cisco . Its shares rose 8%, a six-year high.
Volume at the New York Stock Exchange showed nearly 2.6 billion shares exchanged, while more than 3.5 billion shares were traded at the Nasdaq. Advancing issues topped decliners 8 to 3 on the NYSE, while advancing issues topped decliners 7 to 3 on the Nasdaq.
"Cisco helped, a lot of investors favor this area, they interpret this for being bullish for capital spending," said Metz.
On Tuesday, the Fed held steady on interest rates and retained a bias toward keeping the fight against inflation. But the statement also made prominent reference to the credit markets' recent woes.
Investors were still in an upbeat frame of mind on Wednesday.
"The fact that the Federal Reserve mentioned the credit markets' problems in its statement is reassuring to the market," said Art Hogan, chief market strategist at Jefferies & Co. "They acknowledged that the market's worries are on their minds."
Overnight, the Reserve Bank of Australia upped its key rate by a quarter of a percentage point, to 6.5%, and said credit-market developments "to date don't appear to have changed significantly the broader global outlook."
And the Bank of England, another central bank that has raised interest rates recently, said inflation may hit its target by the end of 2008.
In Washington, the government reported U.S. wholesale inventories rose 0.5% in June, marking the second monthly gain in a row. The rise was linked to stockpiles of petroleum.
The Energy Department reported that crude supplies fell 4.1 million barrels in the latest week, while distillate supplies rose by 1 million barrels.
The Mortgage Bankers Association reported a weekly increase in mortgage applications as interest rates on home loans fell.
The shares of homebuilders rallied as investors found positive signs in Toll Brothers Inc.'s preliminary quarterly results as a home-builder setor plagued by bankruptcy fears posted a dramatic reversal and traded sharply higher on Wednesday.
While Toll Brothers rallied over 7%, other homebuilders also rose sharply, including Hovnanian , D.R. Horton and Pulte Homes .
However, shares of mortgage lender Delta Financial Corp. slid about 35% after it postponed its second-quarter earnings report without offering an explanation.
Sprint Nextel fell 0.15% after it reported a 95% drop in second-quarter net earnings as a result of higher costs and expenses and a lower contribution from operations, though underlying profit of 25 cents a share came in ahead of analysts' 22-cent average forecast.
Treasurys closed sharply lower amid growing speculation China may soon start selling U.S. government bonds. The benchmark 10-year note finished 22/32 off at 97 07/32, its yield climbing to 4.862%.
The dollar was sidelined on news that central banks overseas were raising key interest rates or hinting at rate hikes in the near future. The euro was up 0.4% at $1.3816, while the dollar was up 0.3% against the yen at 119.25 yen.
Crude-oil futures closed with losses following volatile trade, as the Energy Department reported a higher-than-expected fall in U.S. crude supplies. The September crude contract fell 27 cents to $72.15 a barrel on the New York Mercantile Exchange.
Gold closed higher, boosted by a small decline in the dollar against some major currencies. The front-month gold contract ended up $4 at $686.30 an ounce.
By Kate Gibson