Higher U.S. energy stockpiles and the continued cooling of Middle East tensions fueled the drop in crude futures. A barrel of light crude settled at $70.06, down $1.83, on the New York Mercantile Exchange.

Wall Street also welcomed a slight drop in the index of leading economic indicators, which is designed to forecast future economic conditions. The index fell 0.1 percent in July after a 0.1 percent increase in June, suggesting the economy could weaken in coming months. Investors are hoping for a modest slowdown in economic growth to keep inflation pressures at bay.

Some of the day's news was less helpful, with slow sales at Sears Holdings Corp. dragging its stock down and other large retailers reporting slower sales. Yet investors remained enthusiastic after economic data Tuesday and yesterday showed a sharp drop-off in inflation risk.

"Right now, as opposed to three weeks ago, you've got investors willing to buy on some good news, rather than simply not sell on good news," said Chris Johnson, manager of quantitative analysis at Schaeffer's Investment Research. "The mind-set has changed here, and you're seeing that today as we still go higher after these past two days."

The Dow Jones industrial average rose 7.84, or 0.07 percent, to 11,334.96. The Dow gained nearly 229 points in the previous two sessions.

Broader stock indicators also advanced. The Standard & Poor's 500 index added 2.05, or 0.16 percent, to 1,297.48, and the Nasdaq composite index climbed 8.07, or 0.38 percent, to 2,157.61. Including Monday's modest gains, today marked the first four-day stretch of gains for the two indexes since March.

Bonds were little changed after two sessions of gains, with the yield on the benchmark 10-year Treasury note steady at 4.87 percent from late yesterday. The dollar was down against most major currencies, while gold prices rose.

Concurrent rallies in stocks and bonds are rare, since investors in each market buy for different reasons. Bonds generally move higher as investors hedge against a slower economy, while stocks climb based on strong expectations for corporate profits, which need a strong economy to grow.

This week, however, investors in stocks and bonds bid both higher, hoping for the same thing — a "soft landing," engineered by the Federal Reserve's interest rate policy, in which the economy does slow so that inflation is contained, but grows enough to keep corporate profits strong.

"I'm not sure that I endorse this idea, because if you really look at it, the Fed doesn't have a good record of engineering these soft landings," said Ken Tower, chief market strategist for Schwab's Cybertrader. "There's a lot of optimism, though, that the Fed can do just the right thing to steer the economy, but that's based just on this week's economic data. Next month, we could be right back in the soup."

Indeed, there was a small note of warning from the Labor Department's weekly jobless claims report, in which claims fell by the largest margin in a month. There were 312,000 first-time jobless claims last week, down 10,000 from the previous week. Investors fear that a resurgent labor market could boost economic growth too much, sparking inflation and cramping corporate earnings.

For now, however, second-quarter earnings remain strong overall. Dow industrial Hewlett-Packard gained 72 cents to $35.15 after reporting a surge in second-quarter profits, powered by strong laptop and printer sales.

Sears continued its turnaround, posting second-quarter profits that doubled from a year ago, but investors remained concerned about falling sales, which also plagued rivals Wal-Mart Stores Inc. and BJ's Wholesale Corp. Sears tumbled $8.71, or 5.8 percent, to $141.29.

Barnes & Noble Inc. posted a 23 percent jump in quarterly profits, though the gains were fueled by lower costs that helped offset lagging sales. Barnes & Noble gained $1.91, or 5.4 percent, to $37.26.

Shares of Time Warner Inc. rose 29 cents to $16.43 after The New York Times reported that investor Carl Icahn increased his stake in the media conglomerate, a sign that he may renew his bid to gain control of the company.

A New Jersey judge threw out a court victory for Merck & Co. in its ongoing Vioxx painkiller litigation, ordering a new trial of the most recent claim against the drugmaker. Merck slid $2.35, or 5.7 percent, to $38.83.

Advancing shares outnumbered decliners by nearly 6 to 5 on the New York Stock Exchange, where preliminary consolidated volume came to 2.49 billion shares, compared to 2.58 billion traded at the same point yesterday.

The Russell 2000 index of smaller companies was up 3.39, or 0.48 percent, at 710.78.

Overseas, Japan's Nikkei stock average fell 0.31 percent. Britain's FTSE 100 rose 0.06 percent, Germany's DAX index added 0.35 percent, and France's CAC-40 rose 0.15 percent.