Stocks pared gains in the final hour of trading Monday, but remained significantly higher, buoyed by AT&T's $39 billion planned purchase of Deutsche Telecom's T-Mobile USA and buying opportunities in oversold stocks.
The Dow Jones Industrial Average gained more than 165 points, after rising more than 200 points earlier in the session, and after finishing lower last week.
Among Dow components, Boeing, 3M and General Electric gained, while Pfizer lagged.
The S&P 500 rose to under 1,300, while the Nasdaq rose more than 1.5 percent. The CBOE Volatility Index, widely considered the best gauge of fear in the market, plunged more than 14 percent to below 21. (Read more: Is VIX Being Tricky or Is Worst Over for Stocks?)
Most key S&P 500 sectors gained, led by energy, industrials and technology. Telecom fell.
"You read a headline like $39 billion....this is a headline that can create a bounce," said Dan Cook, CEO of IG Markets in Chicago, referring to AT&T's plans to buy T-Mobile USA. While there are "so many hurdles in a deal like that, for today, it cheers markets and gives (investors) something to focus on other than crisis in Japan, crisis in the Middle East."
But, Cook said, the market remains very "event-driven," and short-term trading is in the driver's seat. That's why there have been such big swings up as well as down over the last couple weeks, as traders try to assess the meaning of fast-moving geopolitical events, he said.
"We could be down 200 tomorrow," Cook said. "There's no good long-term trend to really stick to."
Traders also said today's move reflects the sharp decline stocks took last week as the nuclear crisis in Japan was unfolding.
As of Friday's close, the Dow had fallen 4.3 percent from its 2011 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 USA 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 largest wireless provider in the U.S. In addition, HSBC raised its rating on AT&T to "overweight" from "neutral."
Among rivals, Sprint shares plunged as the AT&T deal would make it more difficult for Sprint to gain subscribers, according to Sanford Bernstein, which downgraded the telecom company to "underperform" from "market perform." 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 shareor about $1 billion, sending shares of the smaller rival sharply higher.
And Qualcomm rose nearly 4 percent after news Atheros Communications approved a $3.1 billion merger agreement with the maker of wireless communications products. Sterne Agee raised its rating on Qualcomm to "buy."
Commodities and currencies fell after news the 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 was pared, but the precious metal still closed up 0.73 percent above $1,426 an ounce.
Oil prices remain strong, however, amid persisting geopolitical concerns, including military action in Libyaover the weekend.
London Brent crude rose to just under $115 barrel, while U.S. light sweet crude closed above $102 a barrel.
Most energy firms were higher across the board, including ExxonMobil , Chevron and ConocoPhillips .
Japan’s nuclear crisis continued to unnerve investors amid news 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 have gotten 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.
In a research note, UBS Wealth Management said prices of life insurers and tech companies specifically fell too far in the wake of the Japan crisis. According to UBS, losses among life insurers will be small, and losses among property and casualty insurers will be "manageable," Strategists Brian Rose and Stephen Freedman wrote in a note to clients.
Fears that the tragedies in Japan would crimp production of key supplies to U.S. tech companies sent those stocks falling last week. Those concerns may be warranted, but only in the short-term, Rose and Freedman wrote.
"It is important to recognize that any negative impacts are likely to be temporary," they said.
Elsewhere in corporate news, Citigroup shares sank 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.
Last week, several major banks announced dividends and stock buybacks after the Fed completed a second round of industry stress tests and approved the increased payouts. But several banks traded lower on Monday. "KeyCorp rolled over, then they all did, " said one trader, who added the banks were moving on a "sell on the news" trade.
JPMorgan, Wells Fargo and BB&T, which announced dividends last week, all traded slightly lower.
Channing Smith, vice president and co-manager of Capital Advisors said techs are the next likely candidates to boost dividends.
“The tech sector has the lowest dividend payout ratio compared to any other sectors in the S&P 500, and yet it has the best growth opportunities,” Smith told CNBC.
Channing said firms such as Vodafone , Microsoft , Qualcomm , Applied Materials are most likely to increase or initiate a dividend.
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 Starbucks' 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 flightover 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.
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.
European shareshit a one-week high thanks to AT&T's plans to buy Deutsche Telekom's T-Mobile USA unit for $39 billion. Asian stocksclosed higher, although the Japanese market was closed for a national holiday.
On Tap This Week:
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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