NEW YORK (Reuters) - Stocks notched their fourth week of gains yesterday as investors used a rise in business spending to revive the September rally after three days of losses.

Economic data gave a mixed picture, but traders latched on to a rise in August business spending as the latest sign the recovery is on firmer ground. That seemed to trump a lackluster report on new home sales in August.

"Last month investors were positioned for what we thought would be a double-dip recession and massive inflation, but since it ended up being not nearly so bad, we've swung the other way," said Lawrence Glazer, managing partner at Mayflower Advisors in Boston.

Buying was broad across sectors, with about five stocks rising for each one that fell on the New York Stock Exchange, and four stocks rising for each one that fell on the Nasdaq.

For September, which is historically a weak month, the S&P 500 is up 9.5 percent. Investors said the need for money managers to boost quarter-end performance bolstered buying.

Continuing a recent trend, volume was very light, with only 7.55 billion shares traded on the NYSE, Amex and Nasdaq, far under the previous year's daily average of 9.65 billion shares.

"The volume suggests there's not broad retail participation, and to have conviction in the rally, you'd like to see that," Mr. Glazer said.

The government reported non-defense capital goods orders, which are closely watched as a proxy for business spending, surged more than four percent in August, a rate twice what had been expected.

The Dow Jones industrial average was up 197.84 points, or 1.86 percent, at 10,860.26. The Standard & Poor's 500 Index finished up 23.82 points, or 2.12 percent, at 1,148.65. The Nasdaq Composite Index was up 54.14 points, or 2.33 percent, at 2,381.22.

For the week, the Dow was up 2.4 percent, the S&P rose 2.1 percent and the Nasdaq added 2.8 percent.

Traders noted that a short bias going into the open this morning had been chased out when the market held its gains after the flat housing data. That pushed prices up as traders covered short positions.

The broad-based S&P 500 index crossed a major resistance level at 1,130 on Monday, but its close below that mark in the last session and light trading volumes have caused some investors to question the move's sustainability.

Other technical indicators are pointing to an overbought condition in the S&P 500, although the declines of the last three days have eased that somewhat.

"I think what you have here is month-end and quarter-end pressure developing with huge asset-allocation trades," said Tom Sowanick, chief investment officer of the Princeton, New Jersey-based OmniVest.

Shares of builder KB Home rose 3.4 percent to $12.11 after it posted a smaller-than-expected third-quarter loss. The news offset the weak housing data, and the Dow Jones home construction index rose 2.9 percent.