The return of Merger Monday lifted U.S. stocks to their highest levels in five weeks as major acquisition announcements from Abbot Laboratories (ABT) and Xerox (XRX) boosted investor hope that merger and acquisition activity is rebounding from its previously sluggish pace. Stocks performed markedly better today than on the last Merger Monday, August 31, when big acquisitions by Disney (DIS) and Halliburton (HAL) failed to jolt stocks. The S&P 500 gained 1.8% to close at 1062.98 and the Dow Jones Industrial Average turned in a triple-digit gain, adding 124.17 to close at 9789.36. Tech issues were no slouch either, helping the Nasdaq add almost 40 points to close at 2130.74.

Stats Table

Overall, it was obviously a good day for equities as buyers significantly outnumbered sellers and that helped stocks end three days of losses and take back nearly all of last week's losses. Not to rain on anyone's parade, but it is worth mentioning that volume was fairly light, probably attributable to the Yom Kippur holiday. Less than 980 million shares changed hands on the New York Stock Exchange, well below the daily average for September of 1.3 billion shares and below the 200-day moving average of 1.42 billion shares.

As is usually the case, the devil is in the details and those details show that Bank of America (BAC) and Citigroup (C) combined to trade more than 442 million shares, so from a volume perspective, Monday's trade provided little worth writing home about. That said, it would be foolish to ignore the pick-up in M&A activity. With September drawing to a close, deals involving U.S. firms have reached $49.1 billion, a robust uptick from the $26.6 billion spent on acquisitions in August and $36.8 billion in July.

M&A Activity

Pharmaceuticals giant Abbott said it will pay $6.6 billion for the pharmaceuticals business of Belgian conglomerate Solvay. The deal looks like it makes sense as the hefty price tag may be more attributable to the euro's strength against the dollar than Abbott overpaying for the business. Abbott said it expects the deal to add $3 billion in sales, with half of that number coming from international markets. The acquisition is expected to add 10 cents a share to per share earnings in 2010 and as much as 20 cents a share by 2012.

The Street apparently took kindly to the Abbott news as investors sent the stock higher by $1.25 for a close at $48.58. Normally, the acquiring company endures a hit to its a share price when a mega-deal is announced. That is exactly what happened with Xerox after the world's largest maker of high-speed printers agreed to acquire Affiliated Computer (ACS) for $6.4 billion. The cash and stock deal values Affiliated Computer at $63.11 a share, 34% higher than Friday's closing price. Xerox shares took it on the chin, tumbling $1.29, or 14%, to $7.68. That made Xerox the biggest loser in the S&P 500.

Not to be outdone is Dow component Kraft Foods (KFT), the world's second-largest food company. Earlier this month, Kraft was rebuffed in its attempt to acquire Cadbury (CBY), the number two candymaker in the world. Well, Kraft is not going quietly into night. The company recently froze its dividend and there was scuttlebutt today that Kraft is preparing a $17.5 billion hostile bid for Cadbury. The new offer represents a fair increase to Kraft's initial offer of $16.7 billion. A combined Kraft-Cadbury would have $50 billion in annual sales. Regardless of what happens with Kraft and Cadbury, one thing is apparent and that is companies with strong balance sheets, like Abbott and Kraft, can brave the weak dollar and look overseas for acquisitions that make sense.

And if you are a believer that today's news is just the beginning of more deals to come, it may be time to look at stocks that benefit from increased M&A activity. Obviously that means the likes of Goldman Sachs (GS) and Morgan Stanley (MS) and some boutique advisors like Jefferies Group (JEF).

All three of those names can be found among the top 10 holdings in the SPDR KBW Capital Markets ETF (KCE). The ETF was up $1.27, or 3.4% today, to close at $38.85, putting it within striking distance of its 52-week high of $42.22. Support seems to be firmly established at the 50-day moving average of $36.35 and if psychological resistance at $40 is broken, the 52-week high could fall in the near-term.

It is reasonable to expect M&A activity might pick-up as the economy rebounds. According to the Commerce Department, U.S. companies had $1.5 trillion in cash flow at the end of June and new data from Bloomberg and Credit Suisse shows that number should rise. Cash relative to share prices will climb to its highest level in 20 years in 2010 when compared to the yield offered by corporate bonds, according to the data.

KCE Chart

There was more than just M&A lifting stocks on Monday as some bellwether tech names contributed to the market's bullish ways. Cisco Systems (CSCO) jumped 4.4% to close at $23.61 after Barclays raised its rating on the stock to ''overweight'' from ''equal weight.'' Cisco is now just 39 cents away from its 52-week high of $24.

Of course, it is hard to have a day where the Nasdaq performs as well it did on Monday without mentioning Apple (AAPL). Combining Research In Motion's (RIMM) dour earnings report last week and its 20% decline over the past five days along with Palm (PALM) slashing prices on the Pre (head to Wal-Mart and you can get a Pre for $80) and it is obvious that the iPhone is easily winning the smartphone war.

The good news from Apple just keeps coming. Today, the company said 2 billion iPhone and iPod apps have been downloaded. Here are some fun anecdotes to put that into context: Nearly one out of every three people in the world has made a purchase from Apple App store. There are now more than 85,000 apps available and over 125,000 developers in the iPhone Developer Program.

In other Apple news France's Orange Telecom announced it would start selling the iPhone in the U.K. before the end of this year and China Unicom (CHU) confirmed it will roll out the iPhone in China next month. Now here is the real good news for Apple shareholders on the China front. Not only will China eventually prove to be the most lucrative smartphone market in the world (as the chart below shows), China Unicom will be charging the equivalent of $732 for each iPhone. That is a far cry above what the iPhone costs in the U.S. and it means the Apple profit machine will likely just keep chugging along. Accordingly, Thomas Weisel raised its price target on Apple shares to $210 from $180.

Smartphone Sales Chart

Financials also chipped in on Monday as the group was the top performer among the 10 industry groups tracked in the S&P 500. Even in the face of more bad news, Bank of America found a way to finish up on the day. Another attorney general wants to take a turn going after BofA and CEO Ken Lewis. This time it is Ohio Attorney General Richard Cordray, who is managing a class action suit on behalf of five pension funds. Cordray claims BofA could owe members of the class action ''billions of dollars.''

Beyond BofA, insurance stocks took their turn in the spotlight today as all 21 companies in the group finished up on the day on news that property and casualty insurers returned to profitability on underwriting in second quarter. That means the group made more on premiums than it paid out in claims and expenses. Hartford Financial (HIG), a name that suffered mightily at the hands of the financial meltdown of 2008, was up almost 11% on Monday and Dow member Travelers (TRV) added 3%.

With the group performing so well, I decided to look for a corresponding ETF that might be of interest and that would be the iShares Dow Jones U.S. Insurance Index (IAK), which added nearly 5% today on nearly triple its average daily volume. I should note that IAK is thinly traded, averaging less than 28,000 shares a day, so it may not be ideal for an intraday trade, but with support in place just above $26 and plenty of room to run to the $31-$32 area, the ETF is probably worth a look at this point.

IAK Chart

If nothing else, Tuesday should bring an uptick in volume as the pre-market news docket is chocked full of reports that have market-moving potential. Weekly chain store sales will be announced at 7:45 AM EST. The final second-quarter GDP reading will be released at 8:30 AM. The consensus estimate is calling for a decline of 1.1%. Case Shiller home prices for July will be released at 9 AM, followed by the all-important consumer confidence number at 10 AM. Consumer confidence for September is expected to come in at 56.7, above the August reading of 54.1 and this number is likely to have a profound impact on how stocks trade tomorrow.

Although earnings season does not truly begin until October 7, there are a few earnings reports out tomorrow that might be worth watching. Before the bell, drugstore operator Walgreen (WAG) is expected to tell investors it earned 39 cents a share on sales of $15.68 billion. There are a few reports after the bell, including Darden Restaurants (DRI) and Jabil Circuit (JBL), but the one to watch is Nike (NKE). The apparel and footwear maker is expected to turn a profit of 97 cents a share on revenue of $4.89 billion. Nike shares are up 15% this year.

Looking at the charts, the Dow did traverse 9800 today, but could not stick there, closing just below 9790. On the bright side, the low of the day was also the opening price. Still, it was somewhat disappointing to see that the positive news from Cisco and bullish insurance sector news that benefitted Travelers, was not enough to get the Dow to a close above 9800.

When the Dow passed 9900 last week, it was sold off with some vigor, so that level remains as the next hurdle to be cleared before 10000 can be talked about seriously. If the Dow has not made its way closer to 10000 before Alcoa's (AA) October 7 earnings report, then earnings season will likely be the deciding factor in the Dow's near-term and 2009 performance.

With 9,600 looking like first support, a violation of that level could take the industrials down to 9300 and from there, the picture is not pretty, but a move to 9000-9100 would take some seriously bearish news.

Dow Chart

With 1080 on the S&P 500 acting as the equivalent of 9900 on the Dow, Monday's close around 1062 means the index has some work to do to make its way back to the next important resistance level. Monday's close is significant in that it keeps the index a fair bit away from Friday's low of 1041, which if broken could portend a move to 1035 and then lower, perhaps to 980. The catalysts do exist this week to spur volatility and perhaps big moves in the major U.S. indexes. Consumer confidence and GDP tomorrow and Friday's jobs report will certainly have their say in this week's performance by stocks and with earnings season right around the corner, investors will discover sooner than later if a 2009 close at 1100 is in the cards for the S&P 500.

S&P 500 Chart

The Nasdaq looked to be in trouble after least week's punk earnings report from RIMM and while that stock is one of the ''four horsemen'' of the Nasdaq, the index shrugged off another big decline for RIMM on Monday and moved higher led by Apple and Cisco. After moving above 2160 last week, the Nasdaq was sold off and now must regain solid footing above 2150 before greener pastures can be conquered. The 2160 area has been acting as resistance for over a year, so a string of closes above that level would be significant, but the Nasdaq will likely need more days like today where stocks like Cisco and Applied Materials (AMAT) contribute to the move higher because Apple cannot do all the Nasdaq's heavy lifting by itself.

A couple of closes below 2100 could mean the Nasdaq tests 2063 and a violation of that level could mean some pain is on the way in the form of a move to 2000.

Nasdaq Chart

This week's data points are going to have a heavy hand in where the major indexes reside at the start of earnings season. Then, it becomes of matter of the S&P 500's ability to not only beat estimates, but show some revenue growth and increased market share. Mergers and acquisitions are nice and certainly a good trend as is the continued spate of good news from marquee names like Goldman Sachs and Apple, but the market is going to require more to get the Dow to 10000 and the S&P 500 to 1100. Simply put, some other stocks are going to have to join this party and do so soon.