updated 8/7/2007 7:27:34 AM ET 2007-08-07T11:27:34

Wall Street surged higher in a volatile session Monday, offsetting the losses it incurred Friday but showing more fractiousness than conviction in an advance that lifted the Dow Jones industrials 286 points, its biggest gain in nearly five years.

Major Market Indices

Investors tried to balance their concerns about the availability of credit with hopes that Tuesday’s Federal Reserve meeting will be a calming influence after two weeks of frenetic trading on Wall Street. In a day devoid of economic news and with few earnings reports, investors early in the session seemed to avoid making big bets, though stocks then gained steam after midday.

Fed policy makers are widely expected to hold the nation’s benchmark rate steady at 5.25 percent; as usual, the greater concern is with the Fed’s economic assessment statement. This time, investors will be looking to see what the Fed says about credit.

The Dow’s biggest single-session point gain since October 2002 came follows a number of choppy sessions in which investor sentiment has vacillated between fear about lending to occasional bursts of optimism. Eight of the last 10 sessions have seen swings greater than 100 points in the Dow. The erratic activity has followed the stock market’s high seen July 19, when the Dow closed above 14,000 for the first time and the Standard & Poor’s 500 index also had a record close.

“I really wouldn’t read too much into it,” said Charles Norton, principal and portfolio manager at GNICapital, referring to Monday’s rally. “You’d like to see it be led by the market leaders, not the sort of stuff bouncing off the bottom that’s been beaten up,” he said referring to financial stocks and regional banks.

The Dow soared 286.87, or 2.18 percent, to 13,468.78. The blue chips closed near their highs after zigzagging throughout much of the session. On Friday, the Dow fell 281 points.

Broader stock indicators also rebounded. The S&P 500 index rose 34.61, or 2.42 percent, to 1,467.67. The Nasdaq composite index rose 36.08, or 1.44 percent, to 2,547.33.

The rally was not as widespread as the rise in the major indexes suggested, though. Advancing issues outnumbered decliners by about 6 to 5 on the New York Stock Exchange, where volume came to 2.29 billion shares, compared with 2.11 billion shares traded Friday.

Norton noted that the session’s volume had been about 20 percent to 25 percent ahead of that of Friday early in the session but the gain ended up only 8.5 percent ahead of Friday by the close. He noted that investors typically like to see volume accelerate through the day in a rising market, as such moves can suggest widespread confidence in the gains.

“I think a lot of it has to do with people sort of squaring up before the Fed on the short side, covering some shorts,” Norton said, referring to the market’s move higher and investors who sell stocks “short,” betting that they will fall. Such investors can be forced to buy stock to cover their positions if they believe the market is poised to move higher.

Falling oil could also lend a boost . Light, sweet crude futures tumbled $3.42 to $72.06 a barrel on the New York Mercantile Exchange. Gold prices fell, while the dollar moved in a mixed range against other major currencies.

Stocks have endured a volatile couple of weeks as troubles in the global credit markets — rooted in the rise of subprime loan defaults in the U.S. — have unfolded. Some investors are concerned that bad subprime loans, those made to borrowers with poor credit, remain on the books of some financial companies and have yet to be disclosed.

Aaron Gurwitz, co-head of portfolio strategy at Lehman Brothers Investment Management, said that while he would be surprised if the Fed were to adjust short-term interest rates, the central bank could indicate it stands ready to provide liquidity should credit markets seize up. He noted, however, that the repricing of credit that’s occurring in the markets isn’t something the Fed would likely want to stand in the way of.

“I think it’s a short-term problem,” he said. “I think that the uncertainty in the credit markets, the worries about a liquidity crisis that has to be dealt with, is a risk to the financial markets — but I think it’s a long way from being a risk to the macro economy or the ability of most companies to make money.”

Bond prices fell after rising during Friday’s stock market pullback, signaling investors might be transferring money into stocks. The yield on the benchmark 10-year Treasury note rose to 4.74 percent from 4.68 percent late Friday. Bond prices move opposite yields.

Some of the session’s major corporate news related to subprime loans and credit concerns. Bear Stearns Cos. co-President and co-Chief Operating Officer Warren Spector resigned after the collapse of two hedge funds that invested in risky mortgage-backed securities. Spector was directly in charge of the investment bank’s asset management business. Bear Stearns fell sharply on the news, but then recovered some ground after a Standard & Poor’s managing director said the market overreacted when the agency lowered its long-term outlook on the financial firm.

Bear Stearns rose $5.46, or 5 percent, to $113.81, after falling below $100 briefly.

Merrill Lynch & Co. rose $4.50, or 6.4 percent, to $74.55 after a UBS analyst upgraded the nation’s largest brokerage. Analyst Glenn Schorr contends the problems in the subprime mortgage and credit businesses and the potential ripple effects are now baked into the share price, which has fallen nearly 25 percent for the year.

In other corporate news, Cooper Tire & Rubber Co. on Monday said it swung to a second-quarter profit after sales jumped 17 percent, driven by higher prices in North America and strong growth in Europe and Asia. The tire maker’s results beat Wall Street’s expectations. Cooper advanced $1.07, or 5.1 percent, to $22.25.

The Russell 2000 index of smaller companies rose 10.97, or 1.45 percent, to 766.39.

In trading abroad, London’s FTSE 100 fell 0.57 percent, Germany’s DAX index rose 0.12 percent and France’s CAC-40 fell 1.16 percent.

The often volatile Shanghai Composite Index rose 1.5 percent to a record 4628.11. Japan’s Nikkei stock average dropped 0.39 percent.

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