"It's mostly a technical bounce," said Mike Malone, trading analyst at Cowen & Co. "Financials especially, which have been dragging the market down, are seeing a little bit of a bounce."
The Dow Jones Industrial Average was last up 32 points at 13,384, bouncing from an earlier low of 13,335. Of the Dow's 30 components, 22 advanced, led by Merck & Co. , Johnson & Johnson and AT&T Inc. .
Also among blue chips, Altria Group Inc. rose 1.7%. The company said will take a charge of $325 million, or 10 cents a share, to shut down its 2,500-employee Philip Morris cigarette factory in Cabarrus, N.C., by 2010 in a move to cut costs.
The S&P 500 gained 1.6 points to 1,499, while the Nasdaq Composite rose 5.8 points to 2,582.
Among key technology shares, Apple Inc. dropped 2%, after the company and AT&T Inc. unveiled prices for service plans to use Apple's iPhone. Elsewhere, Oracle fell 1% ahead of its earnings report after the bell.
Trading volumes showed 1 billion shares trading on the New York Stock Exchange and 1.3 billion on the Nasdaq stock market. Gaining shares outweighed decliners by 16 to 15 on the NYSE and by 15 to 13 on the Nasdaq.
Subprime, hedge fund jitters subside
On Monday, stocks closed a volatile session with mild losses amid continued nervousness about subprime lending and the near collapse of two hedge funds owned by Bear Stearns Cos. Inc. , with exposure to that sector. The Dow first rallied to gain over 120 points in the morning before falling back to close down 8 points.
On Tuesday, Bear Stearns bounced back, along with the likes of Goldman Sachs and Lehman brothers .
"The strength in the share price [...] seems to suggest that some investors believe that the recent decline in Bear Stearns was an overreaction," said Frederic Ruffy, analyst at Optionetics. "If so, it could be sign that fears of wider credit problems were also overblown."
Treasury bonds, which had received safe-haven bids since last week, gave back some of their gains. The benchmark 10-year note was down 4/32 at 95-13/32 with a yield of 5.096%.
"We're trying to ascertain what the market is worried about now," said Art Hogan, chief market strategist at Jefferies & Co. "Last week, we were concerned about the yield of the 10-year bond and the Bear Stearns hedge funds time bomb. It's the same this week."
By sector, pharmaceuticals , telecoms and utilities advanced, while gold shares , oil services and natural gas retreated.
A report showing new home sales fell 1.8% in May after surging in April, was still slightly better than expected.
But another housing report -- Standard & Poor's Case-Shiller home price index - showed home prices fell at the fastest pace in 16 years in April.
In addition, homebuilder Lennar Corp. slumped 2.6% after posting a quarterly loss, citing continued deterioration in the housing market. The firm also forecast further weakness.
"There is no reason to think a proper recovery [in housing] will start anytime soon," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
A dearth of over-the-weekend deal news on Monday had fueled concerns that rising interest rates might slow the flow of leveraged deals. Such deals, which often rely on heavy borrowing, have fueled the private-equity buyout bonanza and the stock market over the past few years.
Shares of Blackstone Group LP , the private equity group, slid 4.7% below the $31 level where the company priced shares in its initial public offering last Friday. There are also concerns about proposed legislation that would lift taxes on private quity.
Meanwhile, some deal news came back to the fore on Tuesday.
BlackRock Inc. agreed to buy the fund-of-funds business of Quellos Group for up to $1.7 billion. BlackRock said the deal will make it one of the largest fund-of-funds providers, with over $25.4 billion under management.
The Dutch advocate general declared that ABN Amro's planned $21 billion sale of its LaSalle unit to Bank of America doesn't require a shareholder vote. The decision is viewed as advancing Barclays plc in its bid to acquire ABN Amro.
And News Corp. and Dow Jones & Co. Inc. reached a deal to allow editorial protections for Dow Jones. The deal might pave the way for News Corp.'s $5 billion offer for Dow Jones, the publisher of both The Wall Street Journal and of MarketWatch.
Stocks on the move
Shares of retailer Target Corp. fell 0.7%. The company said that June same-store sales growth will be at the low end of its planned 3%-to-5% range.
On the earnings front, Kroger Co. fell 5.6% after the nation's largest supermarket operator turned in first-quarter earnings that jumped 10% but weren't good enough to please investors who had been expecting more.
There also are earnings reports scheduled for and Nike Inc. after the Tuesday close.
Commodities prices were pushed lower ahead of the data reports later in the morning.
Crude oil futures were last down 80 cents at $68.35 a barrel, ahead of weekly inventories dat on Wednesday and amid concerns that refinery utilization is running low.
The August gold contract dropped $11.1 to $640.80 an ounce.
The yen overnight managed to strengthen against its major rivals after Japanese Finance Minister Omi said he is "watching foreign exchange rate moves very closely", which finally signals some sort of preoccupation by Japanese officials regarding their damaged currency, according to Ashraf Laidi, a currency analyst at CMC Markets.
The dollar last was down 0.1% against the yen and the euro.
By Nick Godt