Stocks rebounded from Friday's huge losses, as oil dropped to near $136 and home builders benefitted from an unexpected surge in real estate sales in April.
Technology, though, prevented a wider recovery as the Nasdaq lagged from lower moves by some of its most prominent names.
The move upward in the Dow and S&P came despite a sharp fall in Lehman Brothers shares after the venerable investment bank said it will raise $6 billion in new capital. The company expects to report a $2.77 billion second-quarter loss.
The tech barometer Nasdaq was lower as Apple dropped more than 2 percent to kick off its annual developers' conference and Yahoo stumbled more than 1 percent following another volley from billionaire investor Carl Icahn, who sent a blistering letter criticizing the company's board.
Overall, stocks added to gains a half-hour into trading after the National Association of Realtors said pending home sales in April gained 6.3 percent. That came as a pleasant surprise considering that analysts were expecting the number to drop 1 percent.
Home builders gained across the board, led by Toll Brothers .
But oil once again seemed to be the dominant force in the market. The price briefly dropped below $136 a barrel after an unprecedented $11 surge Friday to more than $138 a barrel.
"Oil is still going to be weighing on the market. It's still be biggest factor," said Richard Sparks, senior analyst at Schaeffer's Investment Research. "At least off the March lows, the market was able to rally even in the face of higher oil prices. There was a little bit of a dichotomy there. But in hte recent couple of weeks we've seen (oil and stocks) move in opposite directions, like today."
Analysts were expecting a continued pattern of choppy trading, with the Lehman news adding to a general sense of uncertainty about which way the market is heading.
"Until we get some clarity, until these problems at the Lehman Brothers of the world go by the wayside ... then we could probably see some of this money come and hit the market," said Jack Bouroudjian, a principal at Brewer Investment.
Indeed, volatility has returned to the market, with the Chicago Board Options Exchange's Volatility Index above the watershed mark of 20, and up about 30 percent since May 15.
On the sales front, Dow component McDonald's said its same-store sales for May rose 7.7 percent helped by brisk business at is international locations. The fast-food giant and energy leader ExxonMobil led Dow gainers.
In deal news, Honeywell shares moved up after the company announced it would sell its aeropspace fasteners distribution business to B/E Aerospace for 1.05 billion in cash and stock.
In research published Monday, Lehman Brothers analysts said they expect U.S. large-cap banks to incur losses of $79 billion this year, and cut earnings and share price targets for a number of U.S. banks including Citigroup, Bank of America, Wachovia and JP Morgan.
Lehman also cut European stocks to "underweight" and raised U.S. stocks to "overweight", saying that a hike in the European Central Bank's key interest rate would likely affect stock markets on the continent.
In more financial news, CIT Group , a commercial finance company hurt by debt issues, said it is getting a $3 billion cash infusion from Goldman Sachs. CIT shares surged on the news.
Leading fertilizer maker Potash continued its three-month rally, gaining 36 percent since its March lows and moving up Monday following an analyst upgrade.