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Stocks close higher, Dow ends above 12,000

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Morgan Stanley fell after RBC started coverage of the bank with an "underperform" rating. And Capital One slipped after news the bank is expected to buy ING Groep's online-banking business.

Meanwhile, JPMorgan ousted its head of home lending, David Lowman.

Avis Budget said it acquired Avis Europe for $1 billion, raising concerns that the car-rental firm will end the bidding war for Dollar Thrifty, which had also received an offer from Hertz.

On the earnings front, Best Buy jumped after the electronics retailer's results beat estimates and the firm backed its earnings outlook for the year.

GT Solar climbed after the firm boosted its profit and revenue outlook. Other solar stocks were also higher following the news.

Meanwhile, Kellogg slipped after the FDA issued a warning to the cereal producer, saying it found a food contaminant while inspecting one of its plants.

Among the day's economic news, retail sales fell for the first time in 11 months, although the decline was less than expected. Total retail sales slipped 0.2 percent, the Commerce Department reported. Economists expected a decline of 0.4 percent, according to Reuters.

Department stores Nordstrom, Macy's and Saks were trading higher.

JCPenney soared almost 20 percent to lead the S&P 500 after the clothing retailer named former Apple's head of retail operations Ron Johnson as the new CEO.

Meanwhile, the Producer Price Index increased 0.2 percent in May, according to the Labor Department. Excluding the volatile food and energy categories, the core index also increased 0.2 percent.

“Numbers were mostly in line, maybe a little bit better, so the scare is behind us now and we’ve backed into a level where we can find support,” Gordon Charlop of Rosenblatt Securities told CNBC.

Stocks initially soared following news the Chinese central bank raised reserve ratios requirement for banks for the ninth time since last October after data showed inflation rising to its highest level in almost three years.

The report helped boost metals prices, lifting mining and industrial stocks such as Freeport McMoran and Caterpillar.

Analysts said the news suggested a measured slowdown of the Chinese economy and this encouraged investors to go into risky assets. But economist Nouriel Roubini said China is facing a "meaningful probability" of a hard landing.

On the IPO front, Internet radio company Pandora is scheduled to begin trading Wednesday under the symbol "P." The firm is slated to offer 14.7 million shares for $10 to $12 a share. The company increased the size of its IPO last week by 43 percent in the face of high demand.

Also on the economic front, business inventories rose 0.8 percent April, the highest since October 2008, the Commerce Department reported. Economists expected a rise of 0.9 percent, according to Reuters.

European shares closed sharply higher following the positive economic report out of China.

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