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U.S. stocks kicked off March with their best start to a month in more than three years. The major averages closed more than 2 percent higher Tuesday, helped by a rise in oil prices and a better-than-expected ISM manufacturing report. (Tweet This)

The Dow Jones industrial average closed more than 340 points higher at its highest level since Jan. 7. Goldman Sachs was the top contributor to gains, followed by Apple, which closed nearly 4 percent higher at $100.53 a share.

"I think it's near-term price action, possibly some chart chasing, momentum chasing, which continues to forge us higher into the close," said John Caruso, senior market strategist at RJO Futures.

Stocks are rising "on really nothing … that would warrant a (more than 2) percent rise in stocks today," he said.

The major averages had their best first trading day of a month since January 2013. The Nasdaq composite outperformed with gains of 2.89 percent, closing above its 50-day moving average for the first time in 2016. The S&P 500 and Dow also ended above their 50-day moving averages.

"I think when we broke 1,955 on the S&P that got us moving in the right direction. I think you saw a lot of people covering shorts at 1,955," said Peter Coleman, head trader at Convergex.

The S&P 500 had its best morning since Aug. 27 with a rise of more than 1.5 percent through noon, according to Bespoke Investment Group. The index has seen 208 such morning rallies since 1983, with an average additional gain of 0.37 percent in the afternoon from noon to the close and positive returns 69 percent of the time, the note said.

Financials closed up 3.5 percent to lead all sectors except utilities higher.

S&P 500 year-to-date performance

Source: FactSet

Of the several positive factors for stocks, "I would tilt more towards oil. The reality is we've been trading pretty closely with oil in the last couple of weeks," said Kelly Bogdanov, vice president and portfolio analyst at RBC Wealth Management.

U.S. crude oil futures recovered from an intraday dip to settle up 65 cents, or 1.93 percent, at $34.40 a barrel.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, fell more than 10 percent to 17.7, its lowest since Dec. 31.

February ISM manufacturing came in at 49.5, about 1 point above expectations and topping January's 48.2 print. However, the figure still remained below the 50 contraction-expansion level.

The uptick in the February report "adds another piece of evidence we're not falling into recession anytime soon," Jeremy Klein, chief market strategist at FBN Securities.

As of the U.S. market close Tuesday, Fed funds futures were pricing in a roughly 60 percent chance of a December rate hike, up from 30 percent on Monday, according to CME Group's FedWatch tool.

Read MoreFed rate U-turn? Don't bet on it

The morning gains in stocks came despite a temporary turn lower in U.S. crude oil futures, indicating "today that's real buying with the ISM and potentially first-of-the-month (positioning)," Klein said.

The S&P 500 generally posts its best two-month gain over the March and April period, with average returns of 2.66 percent, according to Bespoke.

Treasury yields rose after the data, with the hitting its highest in a month near 0.85 percent and the 10-year yield touching a roughly two-week high just above 1.83 percent. Gold turned lower.

The U.S. dollar index pared gains, with the euro at $1.0876 after hitting a fresh low against the dollar, going back to Feb. 1. The yen traded at 113.88 yen against the greenback.

European Central Bank President Mario Draghi said Tuesday in a Reuters report that euro area inflation trends are weaker than expected and the ECB's policy review in March has to "be seen against the background of increased downside risks to the earlier outlook."

In other U.S. economic news, construction spending rose 1.5 percent in January to its highest level since 2007, Reuters said. The Markit manufacturing PMI for February came in at 51.3, up from the flash 51.0 print but down from January's final 52.4 read.

The Atlanta Fed's GDPNow model forecast for first-quarter real GDP growth declined for the second time in five days, falling to 1.9 percent after the morning's construction spending and ISM report.

February auto sales rose about 7 percent from the same period last year, with Autodata reporting an annualized sales rate of 17.54 million. Last year, U.S. auto sales hit a record 17.4 million vehicles, Reuters said.

"We're seeing strength (in stocks) partly because of strong auto sales and that says a lot about the durability of continued consumer spending, which is underappreciated by Wall Street," Bogdanov said.

"As long as job growth continues, as long as wages continue to drift up, as long as that happens, I think we have the ability for auto sales to meet or exceed last year's strong sales," she said.

The key data for the week is the jobs report, due Friday.

Read More March normally starts one of best times of year for stocks

"Oil going up is a good thing. I think it's the spillover from the Chinese central bank cutting the reserve (requirement) ratio, which is encouraging to people since the Chinese index was down dramatically heading into yesterday's open," said Marc Chaikin, CEO of Chaikin Analytics. He also attributed morning gains to beginning-of-month inflows.

"Today's opening is consistent with the fact the market is starting to trade a little better and I think we've shaken off the bad January," he said.

European stocks closed more than 1 percent higher Tuesday, with the German DAX outperforming with gains of 2.3 percent. The auto and parts sector outperformed.

Asian equities ended mostly higher, with the Shanghai composite closing up 1.7 percent after the central bank's reserve requirement ratio cut and worse-than-expected manufacturing data. The yuan's midpoint fix against the dollar was slightly firmer.

Overnight in China, New York Federal Reserve President William Dudley said he sees downside risks to his U.S. economic outlook, an assessment that could flag a longer pause before the Fed's next interest-rate hike than he and his colleagues had earlier signaled, Reuters said.

"I think the market's now chopping around, worrying about when the next Fed move is going to be," said Maris Ogg, president at Tower Bridge Advisors. "That's why we're getting strange reaction to things."

"I don't think the underlying growth rate in the U.S. has changed at all. Of course, the large economic blocs in Europe and China have added some uncertainty to that," she said.

Tuesday is also "Super Tuesday," when 12 states hold contests.

"There's still this sense of unease and I'm a little bit concerned this won't come to an end until the presidential election," Ogg said.

Major U.S. Indexes: DJIA, NCOMP, SPX

The major U.S. averages closed lower Monday, despite gains in oil, with the S&P 500 and Nasdaq composite posting their first three-straight months of losses since 2011. Traders attributed Monday's decline in stocks largely to late-day sell orders around the month-end.

Read More Early movers: DLTR, MAR, MDT, WBA, AZO, VRX, AAPL, CROX, WDAY & more

The Dow Jones industrial average closed up 348.58 points, or 2.11 percent, at 16,865.08, with JPMorgan Chase rising 5.15 percent to lead advancers and United Technologies the only decliner.

United Technologies closed off session lows, down 1.6 percent, as the only decliner in the Dow after Honeywell said it is no longer pursuing its bid for the company. Shares of Honeywell gained 4.46 percent.

The closed up 46.12 points, or 2.39 percent, at 1,978.35, with financials leading nine advancers and utilities the only laggard.

The Nasdaq composite closed up 131.65 points, or 2.89 percent, at 4,689.60. The iShares Nasdaq Biotechnology ETF (IBB) closed up 4.4 percent after falling 2.8 percent Monday.

About five stocks advanced for every decliner on the New York Stock Exchange, with an exchange volume of 1.1 billion and a composite volume of 4.8 billion.

Gold futures for April delivery settled down $3.60 at $1,230.80 an ounce.

The Dow and S&P closed within 10 percent of their 52-week intraday highs, out of correction territory, while the Nasdaq was 10.37 percent below its 52-week high, in correction territory.

Reuters contributed to this report.

On tap this week:


Super Tuesday

Earnings: Ross Stores, Bob Evans


Earnings: Costco, Semtech, Pure Storage, Brown-Forman, Abercrombie and Fitch

7 a.m.: Mortgage applications

8:15 a.m. ADP employment

11 a.m.: San Francisco Fed President John Williams speaks

10:30 a.m.: Oil inventories

2 p.m. Beige book


Earnings: Kroger, Royal Ahold, Barnes and Noble, Joy Global, Broadcom, Embraer, Ciena, Trina Solar, Cooper Cos.\

7:30 a.m.: Challenger Job-Cut report

8:30 a.m. Initial claims; productivity and costs

9:45 a.m. Services PMI

10 a.m. ISM nonmanufacturing; factory orders

10:30 a.m.: Natural gas inventories

10:45 a.m.: Dallas Fed President Rob Kaplan speaks


Earnings: Staples, WPP Group

8:30 a.m. Employment report; international trade

1 p.m.: Oil rig count

1 p.m.: Dallas Fed President Rob Kaplan speaks

*Planner subject to change.

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