Stocks Trim Gains

The averages end higher but off the session's best levels, in a newsy day.
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Updated from 4:10 p.m. EDT

Stocks ended higher Monday but off their best levels for the day, as momentum faded in the final hour of trading.

The

Dow Jones Industrial Average

finished up 57 points, or 0.6%, at 9177, while the

Nasdaq

rose 21 points, or 1.2%, to 1754. The

S&P 500

gained 6 points, or 0.6%, to 1004. The Dow had climbed as much as 159 points earlier, while the Nasdaq had gained 42 points, as investors cheered two marquee merger announcements, a handful of analyst upgrades and some upbeat earnings from the financial sector. But stocks trimmed their gains late in the session.

Some traders attributed the selloff to a

trading error in so-called E-mini S&P 500 contracts. But others said the action was a natural consequence of recent exuberance in the market.

"I think people could look at this as a fairly important day," said Sean Martin, head trader at A. Gary Shilling & Co. "We faded and reversed, and now I think people are going to look at the charts and say we failed at the highs."

Martin said he is concerned, because stocks have already priced in very solid earnings numbers for the second quarter, which might not materialize. He also worries about the breakdown in the bond market.

The 10-year note declined Monday, pushing its yield up to 3.72%. Yields have been climbing ever since the

Federal Reserve

cut interest rates on June 25 and signaled that the economy might be getting better. Analysts worry that higher yields will crimp corporate borrowing and send mortgage rates higher.

Despite the late-day selloff, stocks did end higher, thanks in part to upgrades on

Intel

(INTC) - Get Report

and

Johnson & Johnson

(JNJ) - Get Report

. Intel hit a 52-week high earlier, as did fellow Dow components

Citigroup

(C) - Get Report

,

American Express

(AXP) - Get Report

and

J.P. Morgan

(JPM) - Get Report

.

Merrill raised its rating on Intel to buy from neutral, setting the price target at $29, citing an expected improvement in gross margins. The firm reports its quarterly results Tuesday. Shares were up 65 cents, or 2.8%, to $24.02.

And Bear Stearns upgraded Johnson & Johnson to outperform from peer perform on attractive valuation. Shares gained $1.72 or 3.3%, to $53.60.

Another pharmaceutical giant,

Merck

(MRK) - Get Report

, was upgraded at CIBC to sector perform from sector underperform on an expected acceleration in revenue. Shares rose 31 cents, or 0.5%, to $61.75.

Signaling an improvement in the M&A market, Yahoo! said Monday that it would buy rival search firm Overture Services for $1.6 billion, or $24.40 a share in cash and stock. Rumors about the deal had swirled for several months as investors speculated that Yahoo! would need to make a big purchase in order to compete with rival Google. Yahoo! traded up 3 cents, or 0.1%, at $32.20 and Overture jumped $2.61, or 12%, to $24.05.

In addition,

Boise Cascade

(BCC) - Get Report

agreed to acquire

OfficeMax

(OMX)

for $1.15 billion, or $9 a share. Boise fell $1.56, or 6.6%, to $21.87, while OfficeMax shares rose $1.42, or 20%, to $8.60.

Meanwhile,

PeopleSoft

(PSFT)

and

J.D. Edwards

(JDEC)

said antitrust regulators have approved their $1.75 billion proposed software merger, and that the deal will be completed as planned on Thursday. Peoplesoft gained 3 cents, or 0.2%, to $18, and JDEC rose 22 cents, or $1.51, to $14.77

Adding to the positive tone were some upbeat earnings from the financial sector. Citigroup beat second-quarter estimates as profit rose amid growth in the bank's securities and consumer businesses. The company also boosted its quarterly dividend to 35 cents from 20 cents. Shares gained 97 cents, or 2.1%, at $47.12.

Bank of America

(BAC) - Get Report

said second-quarter net income rose on higher mortgage banking profit. Shares gained 58 cents, or 0.7%, to $83.46.

Smith Barney analyst Tobias Levkovich reiterated his positive stance on the financial sector Monday, saying that concerns about earnings, interest rates and valuations "seem unjustified."

But Merrill Lynch's bearish strategist Richard Bernstein said only four of his 10 profit indicators suggest that the profit cycle will be stronger than current estimates. "We continue to believe that earnings expectations for the second half of the year are much too optimistic," he wrote in a research note.

In the retail group,

Wal-Mart

(WMT) - Get Report

said last week's sales will help the company reach the high end of its July forecast of a 2% to 4% rise in same-store sales. Wal-Mart rose 0.2%, or 12 cents, to $56.65.

McDonald's

(MCD) - Get Report

declined, however, despite saying that second-quarter earnings would meet analysts' expectations of 37 cents a share. The firm said same-store sales rose 4.9% during the quarter. Shares fell 3%, or 66 cents, to $21.92.

Shares of

Continental Airlines

(CAL) - Get Report

rose even though the firm said it will delay delivery on a large part of its $2.5 billion

Boeing

(BA) - Get Report

aircraft order until 2008 amid a slump in the airline industry.

Chipmakers

Xilinx

(XLNX) - Get Report

and

Altera

(ALTR) - Get Report

were cut to in-line from outperform at Smith Barney on valuation concerns.

Morgan Stanley

(MWD)

is the focus of an inquiry by New York and Massachusetts into whether the firm improperly pressured brokers and branch managers to sell proprietary mutual funds and misled regulators investigating the practice.

Overseas markets were higher, with London's FTSE 100 up 1.7% to 4127 and Germany's Xetra DAX gaining 2% to 3396. In Asia, Japan's Nikkei gained 1.3% to 9755, while Hong Kong's Hang Seng surged 2.1% to 10122.

The 10-year Treasury note was lower, with the yield rising to 3.69%. Crude oil for future delivery was lower in New York. The dollar strengthened against the euro and was lower against the yen.

On Friday, the Dow rose 83 points, or 0.9%, to 9119. The Nasdaq gained 18 points, or 1.1%, to 1733, while the S&P 500 added 9 points, or 1%, to 998.