NEW YORK (CNNMoney.com) -- An October stock surge gained momentum Wednesday, as investors hoping to join the rally pushed the Dow Jones industrial average to a record high for the second session in a row.

The S&P 500 index closed at a 5-1/2 year high and the Nasdaq composite added more than 2 percent.

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The Dow (up 123.27 to 11,850.61, Charts) climbed 1.1 percent, to close at 11,850.61, its highest level ever. On Tuesday, the blue-chip barometer first knocked out its old record from January 2000. Just before the close, the Dow hit a record trading high of 11,851.25, but closed just below that.

The S&P 500 (up 16.11 to 1,350.22, Charts) index added 1.2 percent, closing at its highest since February 2001. The tech-fueled Nasdaq composite (up 47.30 to 2,290.95, Charts) jumped 2.1 percent.

Bonds rallied, sending the corresponding yields lower. Oil prices rose, and gold slumped for a second session.

"It's encouraging to see the Dow hitting all-time highs," said Michael Sheldon, chief market strategist at Spencer Clarke. "It partly reflects the rotation in the market that we've seen over the last few months with large-cap stocks starting to outperform small-cap stocks, at least in the U.S."

A mix of supportive economic news and falling Treasury yields sparked the initial gains Wednesday. But the rally ultimately took on a life of its own.

The gains may have come from "performance chasing," said David Briggs, head of equity trading at Federated Investors, noting the tendency of investors to pile in after they see the market making record highs, for fear of missing out on a bigger rally.

"It's amazing to me how all the bad news has disappeared," Briggs said. "News on the weakening economy is seen as positive by investors, because it means the Fed is done."

The central bank opted to pause its more than two-year old interest rate hiking campaign in August and September and investors are hoping that the bankers may start cutting rates early next year. Such hopes - along with falling oil prices - have helped fuel the most recent leg of the rally.

Investors are also betting that the economy is heading for a slowdown, not a recession. Wednesday's economic news supported those bets, including a weak report on the services sector of the economy and a mild reading on factory orders.

Investors also took comfort from afternoon comments from Ben Bernanke. The Federal Reserve chairman said the housing market slowdown will cut into economic growth both this year and next, but will be tempered by continued low mortgage rates and the strong job market.

Briggs said that while the momentum is positive now, investors shouldn't be surprised if there's a pullback later in the fourth quarter or early next year.

"The seasonal factors haven't worked well this year and that concerns me," he said, referring to the tendency for stocks to struggle in the August through October period, with that weakness leading to a rally in the fourth quarter.

At the very least, odds are growing for a short-term correction or bout of profit taking, added Spencer Clarke's Sheldon, citing a number of technical market factors that point to the risk for a pullback.

As to what could cause a potential short-term pullback, it is unclear. Third-quarter earnings start pouring in soon and if companies start cutting their outlooks in earnest, that could spark some stock selling.

Ahead of that, investors will look to Friday's September employment report, which is expected to show payroll growth roughly in line with the recent trend and no change in the unemployment rate.

Hewlett-Packard (Charts) was likely to be active Thursday on news that the California Attorney General has sought felony indictments against former CEO Patricia Dunn and others involved in the company's boardroom leak probe. The news, reported by Reuters, was released after the close of trade Wednesday.

Apple stock was likely to be active Thursday. After the close Wednesday, the tech bellwether said an internal probe of its past stock-option practices showed errors and as a result, it will likely need to restate past results. Apple (Charts) stock initially gained in extended-hours trading before turning lower.

Starbucks (Charts) shares rallied 5 percent in extended-hours trading Wednesday after reporting that September same-store sales rose 6 percent, topping estimates. The specialty coffee retailer also reported fiscal-year 2006 revenue rose 22 percent from a year ago and said it opened 2,000 new stores during the period.

A variety of hardware, software and Internet shares gained, lifting the Nasdaq.

Biotech, bank, healthcare and telecom stocks gained too, supporting the broader market.

Among Dow issues, 27 out of 30 stocks gained, led by Boeing (up $2.18 to $83.96, Charts), Intel (up $0.25 to $20.82, Charts), IBM (up $1.45 to $83.10, Charts), Microsoft (up $0.57 to $27.94, Charts) and Altria (up $1.26 to $76.90, Charts).

Dow stock General Motors (down $0.09 to $33.32, Charts) was one of the 3 decliners. The automaker ended modestly lower on news the automaker's talks with Renault-Nissan about an alliance have ended without a deal.

Ford Motor (down $0.09 to $33.32, Charts) climbed 4 percent in active trade on speculation that Renault-Nissan might now approach GM's rival.

Dow component Wal-Mart Stores (Charts) ended higher, recovering from earlier losses after it revised its September same-store sales lower. Earlier in the week, the retailer said sales at stores open a year or more had risen 1.8 percent, but now it says the correct number is 1.3 percent, near the low end of the range it initially gave investors.

Valero Energy (up $1.93 to $50.10, Charts) jumped after saying late Tuesday that it expected to report record third-quarter earnings.

Market breadth was positive. On the New York Stock Exchange, winners beat losers by more than 3 to 1 on volume of nearly 1.86 billion shares. On the Nasdaq, advancers topped decliners by 11 to 5 on volume of 2.24 billion shares.

August factory orders were unchanged after falling a revised 0.6 percent the previous month. Economists surveyed by Briefing.com thought orders would fall 0.2 percent.

The Institute for Supply Management's September read on the services sector of the economy fell to 52.9, below forecasts for a drop to 56 from 59 in August. A reading above 50 points to expansion in the sector.

U.S. light crude oil for November delivery rose 73 cents to settle at $59.41 a barrel on the New York Mercantile Exchange, gaining after tumbling to a 7-month low on Tuesday. Oil prices had initially see-sawed following a mixed weekly oil inventories report in the morning.

But the turnaround in oil did not unsettle investors and instead sparked a recovery in recently battered oil stocks, including Exxon Mobil (up $1.20 to $66.61, Charts).

COMEX gold for December delivery sank $14.80 to settle at $566.70 an ounce, after slumping more than $22 Tuesday.

Treasury prices rallied, lowering the yield on the 10-year note to 4.57 percent from 4.61 percent late Monday. Bond prices and yields move in opposite directions.

In currency trading, the dollar gained versus the euro and slipped against the yen.

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