Stocks rose on Monday but ended well off their highs as investors speculated over the Federal Reserve's intentions about its massive stimulus program to aid the economy before a meeting of policymakers that begins on Tuesday.
Major indexes climbed from the start of the session and were more than 1 percent higher for much of the day, recovering all of last week's losses, on the view that the Fed would reaffirm its policies of supporting the economic recovery at the end of a two day meeting that starts on Tuesday.
However, the Financial Times reported the Fed was likely to signal that a move to reduce the program was close.
"We're held hostage in front of comments about what the direction for stimulus is, and the market is always more volatile when it is in front of the information flow," said Dan Veru, who helps oversee $3.8 billion as chief investment officer at Palisade Capital Management LLC in Fort Lee, New Jersey.
Stocks also were supported by economic data that showed homebuilders were more confident and business activity in the New York Fed's district had expanded in June.
The Dow Jones industrial average .DJI was up 109.74 points, or 0.73 percent, at 15,179.92. The Standard & Poor's 500 Index .SPX was up 12.36 points, or 0.76 percent, at 1,639.09. The Nasdaq Composite Index .IXIC was up 28.58 points, or 0.83 percent, at 3,452.13.
Volatility spiked beginning May 22 when Fed Chairman Ben Bernanke said the Fed could reduce the pace of its stimulus in the "next few meetings" if the economy showed continued improvement and inflation remained moderate.
The Dow industrials averaged daily swings near 191 points after that.
A consensus was building among many investors that the U.S. central bank would scale down its policy of buying $85 billion of bonds each month, which was credited with fueling a 15 percent rise in the S&P 500 in 2013.
Investors are anxious to find out where the Fed stands on winding down the stimulus, with some investors and analysts believing there will be no changes this week.
"Short-term traders may want to see the whites of the Fed's eyes before they do anything," said Jim McDonald, who helps oversee about $760 billion as chief investment strategist for Northern Trust Global Investments in Chicago.
The Federal Open Market Committee will release a statement on Wednesday, followed shortly after by a news conference by Bernanke.
With the day's gains, the S&P is within 2 percent of its all-time closing high of May 21.
U.S. homebuilder sentiment jumped in June to a 7-year high, the highest level since the start of the housing crisis. The PHLX housing sector index .HGX rose 1.6 percent. D.R. Horton Inc (DHI.N) rose 1.5 percent to $24.26 while Toll Brothers (TOL.N) added 2.4 percent to $33.66.
In another economic report, the New York Fed's "Empire State" general business conditions index showed expansion in June after a negative reading in the previous month, but the data also showed measures of new orders and employment this month fell to five-month lows.
"While this data was better than expected, some investors are no doubt thinking that it increases the odds that the Fed will begin slowing down," said Kate Warne, investment strategist at Edward Jones in St. Louis, which has $670 billion in assets.
About 64 percent of stocks traded on the New York Stock Exchange closed higher, while 61 percent of Nasdaq-listed shares ended in positive territory.
Netflix Inc (NFLX.O) jumped 7.1 percent to $229.23 as the biggest percentage gainer on the S&P after it signed a multi-year deal for programming from DreamWorks Animation (DWA.O). DreamWorks added 4.1 percent to $23.74.
Advanced Micro Devices Inc (AMD.N) rose 2.8 percent to $4.05 after Barron's said prospects look better for the maker of microprocessors for personal computers.
On the downside, Time Warner Cable Inc (TWC.N) fell 2.5 percent to $101.29 after Raymond James downgraded the stock to "market perform" from "outperform." Terex Corp (TEX.N) tumbled 7.7 percent to $29.29 after the machinery maker cut its earnings forecast.
But trading volume was light as many traders held off adding to positions before the Fed announcement.
About 5.24 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, below the daily average so far this year of about 6.36 billion shares.