Stocks extended their gains in the final hour of trading to close near session highs Monday, recovering from last week's sharp losses, lifted by a positive retail sales report and strong earnings from Citigroup.
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The Dow Jones Industrial Average rallied 95.38 points, or 0.72 percent, to close at 13, 424.23, led by Merck andBofA .
The CBOE Volatility Index, widely considered the best gauge of fear in the market, dropped near 15.
Most key S&P sectors ended in positive territory, led by health care andfinancials, while telecoms closed in the red.
Stocks logged their worst weekly drop in four months last week, with all three major averages falling more than 2 percent. Still, the Dow and the S&P 500 held above their technical support levels at the 50-day moving average.
"The recent economic data point to continued slow recovery, which is overall good news long-term, but the market is looking for another short-term lift following the boost from QE3, " said Natalie Trunow, CIO of Calvert Investments. "There are short-term possibilities of a rough patch unless this earnings season really surprises on the upside, which I don't expect."
On the economic front, retail sales rose in September , according to the Commerce Department. And business inventories increased in August , according to the Commerce Department.
Meanwhile, a gauge of manufacturing in New York state contracted for the third-straight month, according to the New York Federal Reserve.
European shares finished higher after German Finance Minister Wolfgang Schauble said Greece would not default , but warned that if it exited the euro zone it would be damaging for Greece as well as the whole area.
Still, strategists say Europe remains a concern, especially as Spain has yet to formally request a bailout, a step necessary to deal with its ongoing sovereign debt crisis.
"Europe has been a lot more severe than markets have anticipated, " according to Trunow. "Most of the efforts and focus have been applied to policy action, but underlying fundamental data do point to a pretty severe recession."
Also boosting sentiment, data out over the weekend showed China's consumer price inflation eased in September , while producer prices dropped from a year earlier. In addition, a separate report showed showed export growth had rebounded to nearly twice the rate expected in September.
On the earnings front, Citigroup jumped after the financial giant posted quarterly results that topped analysts' expectations .
Other major banks such as Goldman Sachs and Bank of America are scheduled to report later in the week. (Read More: Earnings Look Better So Far, but Market May Not Care)
Eli Lilly jumped after the pharmaceutical company said a potential stomach cancer treatment met goals for improved patient survival in a late-stage clinical study. In addition, Leerink Swann lifted its rating on the company to "outperform" from "market perform." Abbott Labs also rallied after positive results from a mid-stage study of hepatitis C medicines.
Texas Instruments rose after a report that Amazon
Over the weekend, Japan's Softbank said it will acquire a 70 percent stake in Sprint for about $20 billion. Clearwire, which is largely owned by Sprint, soared more than 10 percent. Meanwhile, rivals AT&T and Verizon dipped.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
TUESDAY: CPI, Treasury int'l capital, industrial production, housing market index, News Corp shareholders mtg, Target media day, 2nd Presidential Debate; Earnings from Coca-Cola, Goldman Sachs, J&J, United Health, Mattel, PNC Financial, State Street, IBM, Intel, CSX
WEDNESDAY: Weekly mortgage apps, housing starts, oil inventories; Earnings from BofA, PepsiCo, Bank of NY Mellon, Blackrock, Northern Trust, US Bancorp, AmEx, Ebay
THURSDAY: Jobless claims, Philadelphia Fed survey, leading indicators; Earnings from Morgan Stanley, Phillip Morris, Travelers, Union Pacific, Verizon, Fifth Third, Huntington Bancshares, KeyCorp, Nokia, Google, Microsoft, AMD, Capital One, Chipotle, E-Trade
FRIDAY: Existing home sales; Earnings from GE, McDonald's, Schlumberger, Honeywell, Edward Lifesciences
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