updated 2/28/2006 7:55:59 AM ET 2006-02-28T12:55:59

Tumbling oil prices and strong earnings from home improvement retailer Lowe’s Cos. sent stocks higher Monday, as investors regained their optimism about corporate profits and the health of the economy.

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A bullish outlook and better-than-expected fourth-quarter results from Lowe’s soothed investors’ concerns that earnings would decline as the economy slowed through the year.

Oil prices tumbled on the New York Mercantile Exchange after surging to nearly $63 per barrel Friday as a knee-jerk response to a foiled terrorist attack against a Saudi Arabian processing facility worked through the market. Investors have worried that a lasting spike in oil prices could spark inflation.

Analysts noted that Monday’s buying came after the markets turned in a mixed but promising performance last week despite increasing economic uncertainty and the terror attack, which points to strong investor enthusiasm for stocks.

“I think this is one of those times where it’s hard to be bearish,” said Chris Johnson, manager of quantitative analysis at Schaeffer’s Investment Research in Cincinnati. “We’re still in a market that can easily fall prey to all kinds of intra-day activity, up or down, but I think we have room to go higher over the next two to three weeks.”

The Dow Jones industrial average closed the day up 35.70 points, or 0.32 percent, while the broader Standard & Poor’s 500 index added 4.69 points, or 0.36 percent, and finished just shy of a 4½-year high set on Jan. 11. The technology-rich Nasdaq composite index closed Monday up 20.14 points, or 0.88 percent.

Bonds slipped, with the yield on the 10-year Treasury rising to 4.59 percent from 4.58 percent late Friday. The dollar was mixed against other major currencies, while gold prices fell

Wall Street’s bullishness was undiminished by a disappointing report on the U.S. housing market from the Commerce Department. New home sales dropped 5 percent in January to 1.233 million units. Economists had expected sales of 1.27 million for the month.

Housing stocks suffered on the news, with Toll Brothers Inc. falling 69 cents to $32.65 and D.R. Horton Inc. dropping 87 cents to $35.23. However, with many investors expecting the housing market to cool this year, the selling in that sector did not seep into other areas of the market.

The housing report was the first in a batch of economic data due this week, including reports on the nation’s gross domestic product, retail sales, the industrial sector and the service sector.

“This really is an impressively durable market, but there’s so much more to come later in the week,” said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers. “Ask me later in the week, and we’ll see where we stand then.”

Lowe’s jumped $3.78, or 5.8 percent, to $69.30 after reporting earnings that beat Wall Street profit forecasts by 7 cents per share. The company also issued a very strong outlook for future earnings that came in well above analysts’ forecasts.

Dow industrial The Walt Disney Co. added 40 cents to $28.38 after a report in Barron’s over the weekend suggested the media conglomerate could be purchased by Apple Computer Inc. now that Apple founder Steve Jobs sits on Disney’s board as its largest individual shareholder. Apple fell 47 cents to $70.99.

Armor Holdings Inc. gained $3.67, or 6.6 percent, to $59.13 after it said it will buy fellow defense products maker Stewart & Stevenson Services Inc. for $35 per share. Stewart & Stevenson surged $7.23, or 27 percent, to $34.33.

Merrill Lynch & Co. Inc. rose $1.12 to $77.88 after the Wall Street firm said it would increase its share repurchase program by $6 billion.

Overseas, Japan’s Nikkei stock average rose 0.57 percent. In Europe, Britain’s FTSE 100 closed up 0.26 percent, France’s CAC-40 added 0.13 percent and Germany’s DAX index gained 0.76 percent.

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