Stocks logged their biggest three-day rally since Mar. 2009, fueled by a handful of M&A news and as investors shrugged off some disappointing economic reports. The major indexes wiped out all of last week’s losses following S&P’s downgrade of U.S.’s credit rating.
The Dow Jones Industrial Average ended up nearly 200 points, led by BofA[BAC 7.76 
0.57 (+7.93%) ] and Chevron [CVX 99.10 3.24 (+3.38%) ].
The S&P 500 and the Nasdaq also closed sharply higher. The CBOE Volatility Index, widely considered the best gauge of fear in the market, tumbled more than 10 percent to trade near 31.
Despite the robust gains in the last three sessions, all three major indexes are still significantly lower for August.
All 10 S&P sectors closed higher, led by utilities, energy and financials.
“Everyone’s sitting on their hands and waiting for the Merkel/Sarkozy meeting tomorrow and they might have their hopes too high [as] they’re hoping something can be worked out,” Art Cashin, director of floor operations at UBS Financial Services told CNBC.
German Chancellor Angela Merkel and French President Nicolas Sarkozy are scheduled to meet on Tuesday, where they are expected to discuss the ongoing euro zone debt crisis.
“What we’re seeing right now is a rebound, but if you go back to the ‘87 crash, we rebounded 6 percent the next day and 10 percent the day after that, but by December, we were headed back for another low,” warned Cashin. “So you want to be very careful.”
Wall Street cheered a flurry of M&A activity. Motorola Mobility [MMI 38.12 13.65 (+55.78%) ] surged after Google [GOOG 557.23 
-6.54 (-1.16%) ] said it will acquire the wireless phone maker for about $12.5 billion in cash, a move to bolster the Android mobile phone software.
Research In Motion [RIMM 27.11 2.55 (+10.38%) ] and Nokia [NOK 6.29 0.93 (+17.35%) ] jumped as both companies emerged as potential winners following the Google/Motorola news. Meanwhile, analysts project the merger will not have a big impact on rival Apple [AAPL 383.41 6.42 (+1.7%) ].
Meanwhile, Bank of America [BAC 7.76 0.57 (+7.93%) ] gained after the company said it plans to exit the credit card business in Canada and Europe.
Time Warner Cable [TWC 65.02 -0.49 (-0.75%) ] said it will acquire Carlyle Group’s cable operator Insight Communications for $3 billion in cash, to broaden its presence in the midwest.
And Transocean [RIG 57.26 1.65 (+2.97%) ]launched a $1.43 billion bid for Norway’s Aker Drilling.
Oil prices climbed, withU.S. light, sweet crudegaining $2.50 to settle at $87.88 a barrel, andLondon Brent crude up $1.88 to settle at $109.91. Oil giants led the market higher, thanks to gains from the likes ofExxonMobil [XOM 74.29 2.29 (+3.18%) ] andChevron [CVX 99.10 3.24 (+3.38%) ].
On the earnings front, Lowe’s [LOW 19.68 0.17 (+0.87%) ] reportedweaker-than-expected sales as homeowners delayed big renovations amid an anemic U.S. economy. At least two brokerages cut their price targets on the firm. Meanwhile, rival Home Depot [HD 31.46 0.88 (+2.88%) ] is slated to post earnings ahead of the bell Tuesday, in addition to Wal-Mart [WMT 49.98 0.23 (+0.46%) ].
While the day’s economic news was disappointing, investors seemed to shrug off the bad news. The New York Empire State manufacturing index fell to theirlowest level since Nov. 2010, according to the New York Federal Reserve.
And homebuilder sentiment remained stuck at historic lows in August, according to the National Association of Home Builders.
Despite the disappointing report, homebuilders were up sharply across the board including Lennar [LEN 14.92 0.83 (+5.89%) ], Beazer [BZH 1.87 0.29 (+18.35%) ] and Pulte Homes [PHM 4.84 0.32 (+7.08%) ], all jumped.
More news on the housing market is expected throughout the week with housing starts on Tuesday, weekly mortgage applications on Wednesday and existing home sales on Thursday.
In Europe, the ECB bought 22 billion euros ($31 billion) of government debt last week, reactivating its bond-buy plan to try to halt the spread of the euro zone debt crisis to Spain and Italy.
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