Stocks kicked off the holiday-shortened week with a bang, logging their best one-day rally since September, amid signs of progress to resolve the "fiscal cliff" and following a pair of better-than-expected housing reports.
With the day's sharp rally, the S&P 500 and Nasdaq have wiped out all of last week's declines.
The Dow Jones Industrial Average soared 207.65 points, or 1.65 percent, to close at 12,795.96, led by Bank of America and Hewlett-Packard.
The S&P 500 rallied 27.01 points, or 1.99 percent, to finish at 1,386.89. The Nasdaq jumped 62.94 points, or 2.21 percent, to end at 2,916.07.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, tumbled near 15, hitting a five-week low.
Most key S&P sectors ended in positive territory, led by techs and materials.
"I really think the market's rallying because Washington's a ghost town—the President's out of the country and Congress has adjourned until the middle of next week," said Art Cashin, director of floor operations at UBS Financial Services. "So there's no one there to be quoted saying something to break this mood." (Read More: Goldman Says Stocks Could Fall Another 8%)
Congressional leaders voiced optimism last week about reaching a deficit-reduction deal to avert the "fiscal cliff" and expressed confidence they could reach a deal before Christmas. And over the weekend, President Barack Obama said he is "confident" the fiscal situation could be dealt with by lawmakers.
"This rally started last Friday with the 'fiscal cliff' talks, but I haven't seen any details," said Scott Armiger, portfolio manager at Christiana Trust. "We'll get some kind of deal but I don't know that the deal is going to help the economy—if the deal is more tax oriented, to us, it's not going to help the economy. We remain cautious." (Read More: 'Fiscal Cliff' Fever Breaks—Does the Bounce Have Legs?)
"And the market's also reacting to positive news out of Europe that Greece is going to get their next wasted loan—so the can will get kicked down the road. It's only buying time," added Armiger.
Euro zone finance ministers are expected to give a tentative approval for the disbursement of 44 billion euros in emergency loans to Greece on Tuesday, but the money will only be paid on Dec. 5 if the nation meets all remaining conditions, according to a report from Reuters. European shares ended sharply higher following the report. And the euro rallied to session highs versus the U.S. greenback.
On the economic front, existing home sales unexpectedly rose in October to a seasonally adjusted annual rate of 4.79 million units, according to the National Association of Realtors. And the homebuilder sentiment gained for a seventh-straight month in November, according to the National Association of Home Builders.
Homebuilders including Toll Brothers, Beazer and Pulte rallied.
Intel eked out a gain after the tech giant announced that president and CEO Paul Otellini, has decided to retire in May.
Also among techs, Cisco edged higher after the tech bellwether said it will acquire privately-held cloud networking company Meraki in a deal worth $1.2 billion as part of its cloud and networking strategy.
Apple spiked more than 7 percent, rebounding after the iPad maker briefly touched a nine-month low last week. While the tech giant is no longer trading in bear territory, the stock is still off more than 20 percent since hitting an all-time high in late September.
Citigroup will slash 300 jobs globally this year, according to the Wall Street Journal. Separately, the bank also agreed to pay $360 million to the brokerage estate of Lehman Brothers to resolve a dispute over $1 billion in collateral that the investment bank was forced to post in the days leading up to its bankruptcy in 2008.
Among earnings, Lowe's jumped after the home-improvement retailer reported quarterly results and same-store sales that topped expectations.
Tyson Foods soared more than 10 percent to lead the S&P 500 gainers after the food producer exceeded earnings expectations and boosted its quarterly dividend.
Urban Outfitters and Jack in the Box are among companies slated to post earnings after the closing bell.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
TUESDAY: Housing starts, Richmond Fed's Lacker speaks, Bernanke speaks at the Econ. Club of New York, Kindle Fire HD w/4G LTE ships; Earnings from Hewlett-Packard, Best Buy, Campbell Soup, Chico's, Salesforce.com
WEDNESDAY: Weekly mortgage applications, jobless claims, PMI manufacturing index flash, consumer sentiment, leading indicators, oil inventories; Earnings from Deere
THURSDAY: Happy Thanksgiving! - Markets closed
FRIDAY: Black Friday - NYSE closes at 1pm ET / CME closes at 1:15pm ET
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