Stocks advanced on Tuesday as solid earnings and a flurry of merger action laid the foundation for a steady upward trend in the equities market that investors potentially see accelerating.

U.S. stock indexes hit new highs after topping key technical resistance levels. The S&P 500 has rallied more than 6 percent to two-year highs this month and was up around 22.6 percent from closing lows this year.

Financials led the way higher, continuing their December rally after underperforming the broader market for much of the year. The KBW bank index <.BKX> jumped 1.7 percent.

As a manager you have to look at what has not gone up all that much, and it's really been financials, said Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston.

It really comes down to the fact that we're that much further in the recovery cycle, and these companies are generally instrumental for providing the lubrication that the economy needs in its second step out of recession.

Analysts said equity markets were also got a boost as fund managers reallocated cash to equities from fixed income and reduced cash positions on expectations of an improving economy.

The Dow Jones industrial average <.DJI> added 48.44 points, or 0.42 percent, to 11,526.57. The Standard & Poor's 500 Index <.SPX> gained 6.81 points, or 0.55 percent, to 1,253.89. The Nasdaq Composite Index <.IXIC> rose 16.89 points, or 0.64 percent, to 2,666.45.

Adobe Systems Inc jumped 4.8 percent to $30.58 a day after an upbeat forecast in contrast with a pessimistic outlook three months ago.

Coal miner Massey Energy Co rose 1.4 percent to $52.55 after the Wall Street Journal reported rival Alpha Natural Resources Inc offered to buy it. Alpha climbed 2.5 percent to $54.93.

Adding to the positive tone, American International Group Inc gained 2.8 percent to $54.94 after officials briefed on the situation told Reuters the U.S. government plans to sell a large piece of its stake in the company.

Further supporting rising stock indexes were recent technical signals indicating the march upward could continue.

The S&P 500, which has gained in each of the last three weeks, broke through the 61.8 percent Fibonacci retracement of the 2007-2009 bear market slide earlier this month.

Technicians said the next stop is the 76.4 percent retracement at 1,362. The exponential Relative Strength Index (RSI), though, suggests the S&P may be overbought in the short term. The RSI provides a measure of higher closes to lower closes over a given trading period and is closely watched by traders.

In other individual movers, Martek Biosciences Corp surged 35.2 percent to $31.59 after Dutch group DSM , the world's largest vitamins maker, agreed to buy the maker of U.S. baby food ingredients.

Jabil Circuit Inc , the electronics manufacturer, advanced 10.5 percent to $19.51 a day after it reported better-than-expected quarterly profit and forecast a robust second quarter.

(Editing by Jeffrey Benkoe)

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