Stocks rallied as investors snapped up shares in the beaten-down financial sector despite uneasiness surrounding the health of credit markets and the U.S. economy.
"We got a big sigh-of-relief rally," said Arthur Cashin, director of floor operations at UBS. "Merrill gets recommended, the financials start to look better and everybody's hoping for a pat on the head from the Fed."
The Dow Jones Industrial Average closed with a gain of more than 270 points, or 2.1%, erasing all of Friday's 281-point swoon in the blue chip index. The S&P 500 rose 2.1% while the Nasdaq Composite's gain of 1.2% lagged other major indexes.
"I think Friday, we had a major selloff and the market was oversold," said Todd Leone, head of listed trading at Cowen. "Nothing happened over the weekend, so I think you're seeing people come in and buying the market here."
Nine of the ten S&P 500 sectors were trading higher, with the beaten-down financials sector leading the rally. Bargain hunters picked up brokerage, mortgage agency, health and life insurance and banking stocks. The banks were bolstered by an announcement from Wells Fargo that it would buy back an addition 50 million shares. Today was the best day for the banks since October 2002.
Materials, which had been negative, turned positive again. Energy was the only declining sector, weighed down by a sharp drop in oil prices. American International Group was the best performer on the Dow ahead of its second-quarter earnings report Wednesday. Banc of America reiterated its overweight rating on life insurers over the weekend.
"Volatility is back with a vengence," Rick Pendergraft, chief investment analyst at Investor's Daily Edge, told CNBC.com. "We were reaching oversold levels on a lot of things and that's driving people back in. But I wouldn't dive head-first, just stick your toe in."
"The volatility is not unusual given the history of the market, but it's certainly frightening for those who have only been around the market a couple of years," said John Buckingham, chief portfolio manager at Al Frank Asset Management. "I view it as a long-term buying opportunity even as I concede stocks could go lower from here."
Investors were also mindful of the upcoming interest rate decision and statement from the Federal Reserve Open Market Committee tomorrow.
"I think the Fed's going to say something in the wording that eventually leads me to believe they are going to ease in the near future," said Leone.
Merrill Lynch was upgraded to buy from neutral at UBS. The brokerage firm said Merrill offered stability, diversification and growth at a reasonable price.
UBS also upgraded shares of online financial services company TD Ameritrade to buy from neutral, saying the recent selloff in the stock was overdone.
"I think we're probably in a near-term pattern of buy them early in the week and sell them late in the week," said Stephen Sachs, director of trading at Rydex Investments. "I think this week is going to be a great example of that. If nothing else, you have to get use to the intraday volatility that we've seen over the last couple of weeks."
American Home Mortgage filed for bankruptcy protection after laying off almost 90% of its 7,000 employees Friday. Just ten days ago, what was the 10th-largest U.S. home lender froze the 70 cent-a-share dividend scheduled to be paid that day.
Bear Stearns President and co-Chief Operating Officer Warren Spector handed in his resignation Sunday, a couple of days after the investment bank said it was dealing with the worst financial market situation in 20 years.
Chrysler also underwent an executive shake-up, as its new owner Cerberus Capital Management announced former Home Depot chief executive Robert Nardelli would take the top slot at the automaker.
Also in corporate news, auto parts maker Delphi cleared a hurdle to emerging from bankruptcy, ending a strike and tentatively agreeing to a four-year contract with employees in the Communications Workers union.
New York light sweet crude futures fell more than $3 to trade below $72 a barrel, extending a decline prompted by news last week of a cooling U.S. job market.
European Stocks Finish Mixed
European stocks started the week with a mixed performance Monday as continued fallout from the U.S. subprime mortgage sector prompted a move to less risky investments.
"Investors (are) running away from risk, essentially, and that is strongly benefiting the bond market," John Wraith, Head of Rates Strategy at Royal Bank of Scotland, told "Squawk Box Europe."
The London FTSE-100 closed lower, while the Frankfurt DAX was slightly higher, and the Paris CAC-40 finished lower.
Looking to individual companies, Munich Re shook off the market malaise, with shares gaining, as the company boosted its full-year profit target.
And IKB's biggest shareholder has played down reports the German lender could lose more than the 3.5 billion euros ($4.8 billion) due to U.S. subprime exposure, Reuters reported.
In the U.K., ICI tentatively agreed to a sweetened 8 billion pound ($16.3 billion) takeover offer by Dutch rival Akzo Nobel and a German partner, the Wall Street Journal reported Sunday.
And the ongoing battle for ABN Amro was in focus as Barclays formally launched its 65 billion euro ($89 billion) bid for the Dutch bank.
Belgian bank Fortis, which forms part of a rival offer with Royal Bank of Scotland and Santanderreceived shareholder approval to fund its portion of the consortium's $97 billion offer. 95.5% of holders voted in favor of the bid at the first of two extraordinary general meetings.
Asian Stocks Mostly Lower
Asian stocks continued to be beaten down in the afternoon session Monday with markets hit by global credit jitters. Australia, Japan and South Korea all closed lower.
Data last Friday showing U.S. employers added jobs at the slowest rate in five months and weaker growth in the U.S. service sector all added to concerns about the world's biggest economy, Asia's top export destination. Bear Stearns also rattled investors with comments that credit markets were in their worst shape in two decades.
Tokyo's Nikkei 225 Average closed off its lows with exporters such as Canon losing ground on Wall Street's tumble and the stronger yen, while financial shares slid again on worries about earnings and subprime lending problems. Bargain hunting kicked in for shipping stocks and others with profit prospects, helping trim some of the overall losses.
South Korea shares extended a recent slide to fall 1.2%, as financials such as Kookmin Bank
suffered from worries over global credit conditions, with exporters further dented by last week's weak U.S. jobs data. Samsung Electronics fell 1% following a temporary halt in its chip production line due to a power outage Friday, although shares came off their session lows on expectations losses would be limited.
Australian shares finished 1.4% lower after fresh signs of weakness in global credit markets
hit financial stocks such as Macquarie Bank, while resource stocks dropped on a fall in base metal and oil prices. The index has now fallen 7.7% since hitting a lifetime high of 6,436 on July 13.
Hong Kong stocks plunged with the Hang Seng Index falling below the key 22,000 support level. Finance stocks were hit especially hard, after sharp declines on Wall Street revealed growing concerns about the U.S. credit market.
Singapore's Straits Times Index fell 3.7% in its sharpest one-day decline in five months, as banks were hit by credit market concerns triggered in the U.S. DBS Group, Southeast Asia's top lender, plunged over 5%, United Overseas Bank dropped as much as 6.2% and Oversea-Chinese Banking fell over 4%.
But bucking the regional trend, China's Shanghai Composite Index surged more than 1.5% to a fresh record high, as investors once again largely ignored weakness in global share markets due to the U.S. subprime mortgage squeeze. China remains largely immune from global contagion because foreign investment is a tiny fraction of market capitalization, and since Chinese banks
are believed to have minimal if any exposure to the U.S. credit problems.