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Retail Stocks Gain; Airlines Slide

Stocks advanced Monday, with retailers ringing up gains after a report showed the holiday-shopping season was better than expected.

Resource stocks also advanced as oil hit its highest level in a month, topping $79 a barrel. But airline stocks skidded amid worries about security after an incident during the height of holiday travel last week.

Some encouraging news on the economic front: Midwest manufacturing activity rose in November to its highest in nearly a year, the Chicago Fed reported.

Volume was expected to be lighter than usual, given this second-straight holiday-shortened week. All US financial markets are closed Friday for the New Year holiday.

The Dow, the S&P 500, and the Nasdaq are all on pace to chalk up their biggest yearly percentage gains since 2003, and with a gain of about 1.5 percent this week, the S&P would have its best annual advance since 1998. The major averages have advanced, albeit modestly, for five consecutive sessions.

One factor in determining the stock market's mood will be the success of $118 billion in Treasury auctions this week. The Treasury will sell $44 billion in 2-Year Notes Monday, with the results available shortly after 1 pm New York time. Tuesday will see the same of $42 billion in 5-Year Notes, while $32 billion in 7-Year Notes will be sold on Thursday.

IBM and 3M led the Dow. Alcoa and American Express were at the bottom of the pack.

Retail stocks rallied after MasterCard'sSpendingPulse report showed holiday sales (Nov. 1 to Dec. 24) rose 3.6 percentfrom last year.

"This game of chicken that went on between retailers and shoppers, it looks like the retailers won," Stephen Massocca, managing director at Wedbush Morgan, told Reuters. "They held out, there weren't deep discounts prior to Christmas, and people actually came in and bought the merchandise, so that bodes well."

Among the season's early winners were Gap , Walmart and Amazon .

Gap and Walmart got out front with heavy discounts — about 60 percent of Gap's store space was devoted to discounted items, according to Wedbush store checks.

Amazon benefited from strong Kindle and e-book sales. The online retailer said its customers actually bought more e-books than physical bookson Christmas Day — the first time ever that's happened.

This week is expected to be another big one for retailers. January may be weaker than last year as many shoppers skipped the gift cards, instead searching for bargains on specific items.

Apple rose, after hitting an all-time high last Thursday, amid rumors that the company will soon be out with a tablet computer, popularly referred to as the "iPad."

Winterizing Your Portfolio - A CNBC Special Report
Winterizing Your Portfolio - A CNBC Special Report

Thomas Weisel also was out Monday with postive comments on Apple. The firm raised its estimate for the company's fiscal first quarter to $3.55 a share from $3.36 a share, citing strong demand for iPhones and iMacs.

Whole Foods slipped following news that CEO John Mackey plans to give up his chairman title.

After rallying for the past five months, airline stocks were grounded as a botched terrorist attackover the holiday travel season led to tighter security procedures and worries about a decrease in travel.

Shares of Delta, the parent of Northwest Airlines, on which the incident occurred, fell more than 3 percent. Shares of AMR , parent of American Airlines also lost more than 3 percent.

The market was also buzzing about a bold prediction that Warren Buffett will step downas CEO of Berkshire Hathaway next year.

The prediction came from Seabreeze Partners' Doug Kass, who, if you recall, successfully shorted Berkshire in 2008.

"With the Burlington Northern acquisition, the Oracle has basically completed his canvas and there's really very little left for him to do," Kass said as guest host of Squawk Box this morning.

This Week:

MONDAY: 2-year Treasury auction
TUESDAY: Case-Shiller home-price index; consumer confidence; 5-year auction
WEDNESDAY: Weekly mortgage applications; weekly crude inventories; 7-year auction
THURSDAY: Weekly jobless claims
FRIDAY: New Year's Day — all US financial markets closed

Send comments to cindy.perman@nbcuni.com.