Stocks gained as investors continued to look for buying opportunities in oversold stocks, and as they took heart from stepped up M&A activity.
The Dow Jones Industrial Average gained more than 185 points after ending the week lower.
Among Dow components, Boeing , 3M and Microsoft, gained, while Pfizer and Bank of America slipped.
The S&P 500 and the Nasdaq also rose more than 1 percent. The CBOE Volatility Index, widely considered the best gauge of fear in the market, sank nearly 15 percent to below 21.
All key S&P 500 sectors gained, led by energy, technology and industrials.
As of Friday's close, the Dow had fallen 4.3 percent from its high on Feb. 18, while the S&P 500 had fallen 4.75 percent. Investors who believed stocks had been oversold began buying stocks at the end of last week, and that buying continued on Monday.
"The market has already discounted the worst case scenario, and is now looking forward," Dan Fitzpatrick, president of Stockmarket Mentor said on CNBC.
In the face of extreme volatility, however, Fitzpatrick said it is a "traders market, because of all the uncertainty."
Analysts expect AT&T's plans to buy T-Mobile U.S. from Deutsche Telekom, which was subject to approval by regulators, will be positive for both AT&T and Deutsche Telecom. The merger would create the large wireless provider in the U.S.
AT&T shares gained slightly, while the German company’s shares rose as much as 14 percent following the news. Shares of Sprint sank. T-Mobile U.S. has not been able to compete with bigger U.S. companies.
Meanwhile, Verizon gained after S&P Equity upgraded the telecom company to "hold" from "sell," saying the AT&T/T-Mobile deal offers Verizon "opportunities to defend and perhaps increase its wireless market share in the near term."
Also on the M&A front, Charles Schwab said it will buy OptionsXpress in an all-stock deal for $17.91 a share or about $1 billion.
Commodities and currency prices fell back after news the U.S. Treasury planned to sell $142 billion in mortgage-backed securities, on the perception "easy money” was coming out of market and liquidity would suffer.
The price of gold dropped $4 an ounce, although it still traded higher, above $1,431 an ounce.The price of silver also fell.
Crude oil, which had traded higher, dropped $1 a barrel. Oil remain strong, however, amid persisting geopolitical concerns, including military action in Libyaover the weekend.
London Brent crude rose above $115 barrel, while U.S. light sweet crude traded at more than $103 a barrel.
Japan’s nuclear crisis also continued to unnerve investors. Japan’s nuclear safety agency said there was no need to widen the evacuation areas around the earthquake-hit reactors, but the World Health Organization said contamination of some foods and water with trace amounts of radioactivity is a more serious problem than originally expected.
The market also may be getting a boost from comments by Warren Buffett, who said the tragedies in Japan have made shares of Japanese companies attractive buying opportunities, according to Simon Denham, CEO of Capital Spreads.
Elsewhere in corporate news, Citigroup shares gained after the banking giant announced a 1-for-10 reverse stock split,which will reduce Citi's outstanding common shares. The bank also said it will reinstate a quarterly dividend in the second quarter. The dividend will be 1 cent.
Kraft was among the few Dow components to fall after JPMorgan downgraded the processed foods maker to "neutral" from "overweight," citing Kraft's loss of the Starbuck's licensing agreement among other factors.
Among the best Dow performers, Boeing got a boost after its 747-8 Intercontinental, the new passenger version of its jumbo jet, the original 747, had a successful first flight over the weekend.
In earnings news, shares of Tiffany gained after the luxury jeweler gave a better-then-expected outlook based on gains of 20 percent in Europe and Asia, not including Japan.
New York Times gained more than 3 percent after Citigroup raised the publisher to "buy" from "hold," citing the shift to online subscribers.
And Qualcomm rose nearly 4 percent after news Atheros Communications approved a $3.1 billion merger agreement with the maker of wireless communications products.
On the economic front, existing home salesfell well below expectations, dropping 9.6 percent to 4.88 million units. That's also a 2.8 percent year-over-year drop.
In the currency markets, traders will be seeking signs that central banks may take additional action to weaken the yen following an agreement last week to intervene as the currency soared in the wake of Japan’s disastrous earthquake and resulting nuclear crisis. The yen has fallen against the dollar.
European sharesrose in early trading, while Asian stocksclosed higher. The Japanese market was closed for a national holiday.
On Tap This Week:
MONDAY: Obama in Latin America; Fed Chairman Bernanke, FDIC Chair Bair at commercial bankers conference.
TUESDAY: CTIA Wireless Convention; before-the-bell earnings from Walgreens; after-the-bell earnings from Adobe.
WEDNESDAY: Caterpillar analyst meeting; annual meetings for Disney, HP and Starbucks; mortgage applications, new home sales, oil inventories; before-the-bell earnings from General Mills.
THURSDAY: EU summit; durable goods, jobless claims, natural gas inventories, 10-year TIPS auction, money supply; before-the-bell earnings from Best Buy and ConAgra; after-the-bell earnings from Oracle, Research in Motion.
FRIDAY: USDA food prices outlook; GDP revision, corporate profits, and consumer sentiment.
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