The National Association of Realtors' index for pending sales of existing homes rose in February at a seasonally adjusted annual rate of 0.7 percent. The index is well below where it was a year ago but stronger than investors expected, reassuring them that the housing sector, while weak, is not being pummeled by the struggling subprime mortgage sector.
The Dow rose 128.00, or 1.03 percent, to 12,510.30 its highest close since Feb. 26, the day before it made its 416-point plunge. The blue chip index is back in positive territory for the year, and 276 points below its record close of 12,786.64, reached Feb. 20.
Broader stock indicators also soared. The Standard & Poor's 500 index gained 13.22, or 0.93 percent, to 1,437.77, and the Nasdaq composite index added 28.07, or 1.16 percent, to 2,450.33.
Bonds were lower after the home sales data, with the yield on the benchmark 10-year Treasury note at 4.67 percent, up from 4.65 percent late Monday. The dollar rose against other major currencies and gold prices slipped.
Light sweet crude dropped more than a dollar to $64.64 a barrel on the New York Mercantile Exchange.
Airline stocks climbed on the prospect of declining fuel costs, as well as a rise in Continental Airlines Inc.'s passenger revenue. Continental Airlines rose $3.03, or 8.4 percent, to $39.08.
Meanwhile, March auto sales showed weakness among U.S. automakers. GM, Ford Motor Co. and DaimlerChrysler all reported that U.S. sales fell, while Japan-based automakers Toyota, Honda Motor Co., and Nissan Motor Co. saw theirs rise.
GM rose 64 cents, or 2 percent, to $31.47, after reporting an increase in China sales. Ford fell a penny to $8.08, and Daimler Chrysler fell $1.07 to $82.95.
U.S. shares of Toyota, which is closing in on Ford to become the United States' No. 2 automaker, rose 11 cents to $127.03. Nissan's U.S. shares rose 3 cents to $21.57, and Honda's rose 80 cents, or 2.3 percent, to $35.49.
Advancing issues outnumbered decliners by about 3 to 1 on the New York Stock Exchange, where consolidated volume came to 2.90 billion shares, up from 2.80 billion shares Monday.
The home sales report, the primary catalyst driving up stocks Tuesday, was not especially robust, but the market has been hungry for some decent news on the housing front to suggest that the broader economy is impervious to the financial problems of subprime lenders, companies that make loans to people with poor credit.
While Tuesday's stock gains were strong, the market remains vulnerable; the subprime lending market is still shaky, and earnings season is less than two weeks away.
"I don't think we're out of the woods yet," said John O'Donoghue, co-head of equities at Cowen & Co., noting that some of the market's gains were probably due to frustrated traders short-covering, or buying back bets that prices would fall. "The market has exhibited a certain amount of complacency. We'll see how earnings come in."
Investors are treading fairly optimistically toward the first quarter earnings season. So far, there have been a few profit warnings notably from a few homebuilders but some investors had braced for more dire earnings preannouncements.
"When economies are softer than anticipated, companies get a lot of negative suprises. It's way too early to say this definitely, but perhaps the economy isn't slowing as rapidly as envisioned," Caughey said.
The Russell 2000 index of smaller companies rose 8.55, or 1.06 percent, to 811.77.
Overseas markets were also strong. Japan's Nikkei stock average rose 1.27 percent, Britain's FTSE 100 rose 0.80 percent, Germany's DAX index rose 1.56 percent, and France's CAC-40 rose 1.18 percent.