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Stocks finish flat despite upbeat retail data

Updated at 4:05 p.m. ET: Stocks closed Tuesday flat despite signs of improvement in the retail and housing sectors.

Home Depot raised its profit forecast, saying it saw improvement in the housing market and retail sales data showed better-than-expected headline numbers, giving an early boost to the market.

Earlier, the market had rallied on hopes of further stimulus from central banks around the world to boost the global economy.

"The next two weeks' data will lead into the annual Fed meeting at Jackson Hole," said Peter Cecchini, managing director at Cantor Fitzgerald & Co in New York, noting that while the headline numbers from the retail sales data exceeded expectations, the previous month's numbers were also revised.

Retail sales rose 0.8 percent in July, the biggest increase since February and better than a forecast of an 0.3 percent rise. The previous month's numbers were revised to minus 0.7 percent from minus 0.5 percent.

"The revision will likely be ignored, but it produces a print slightly worse than expectations (ahead of the Jackson Hole meeting)," Cecchini said. He added that the data was important because U.S. Fed Chairman Ben Bernanke has traditionally used the Jackson Hole venue as an opportunity to signal Fed direction, and many believe that he will do so again.

The S&P 500 is now within a stone's throw of new four-year highs, leaving investors looking for new catalysts to move the market higher.

"The U.S. stock market has been moving higher this summer even though investor sentiment has been more bearish than bullish.

However, after eight weeks of the stock market making higher highs and higher lows, investors are finally more positive than negative," said chief macro strategist Gary Thayer at Wells Fargo Advisors.

"As sentiment improved during the past couple of weeks, the demand for bonds as a perceived safe haven has diminished, and the bond market has started to decline. If sentiment continues to improve, stocks are likely to outperform bonds as they did earlier this year."

The better retail sales data dovetailed with strong earnings reports from niche retailers like Estee Lauder.

Home Depot Inc, the world's largest home improvement chain, gained as the top boost to the Dow after the company reported a higher-than-expected quarterly profit and kept a tight lid on costs to offset weakness in sales.

Home Depot is seeing improvements in California and Florida, states that were hit hard by the housing downturn, according to Chief Executive Officer Frank Blake. The comments helped lift housing stocks.

Reports from smaller retailers supported the thesis of robust consumer spending that may help lift overall growth.

But Groupon Inc tumbled after the world's largest online daily deals provider missed quarterly revenue expectations and gave a cautious profit outlook.

Reuters contributed to this report.