Investors also awaited the official kick-off of earnings season with Alcoa's report after the close.
"The Alcoa numbers will set the tone," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.
Investors moved money to different sectors ahead of earnings reports, trying to position themselves in sectors likely to post firm, or at least, better-than-expected results, he said.
"We now see on a regular basis that money seems to be flowing back into financials," Fitzpatrick said.
The Dow Jones Industrial Average finished up 3 points at 12,612, with 16 of its 30 components moving higher. Financial stocks led the gains among blue chips, with shares of Citigroup Inc. up 2.2%, American International Group Inc. , up 1.6%, and American Express Co. up 1%.
The S&P 500 Index rose 5 points to 1,375, while the Nasdaq Composite Index dipped 4 points to 2,366.
"I'm encouraged by market action over the past three weeks," said Ken Tower, chief market strategist at Covered Bridge Tactical. "We shrugged off the very bad data that we saw on Friday, which was very positive for the market."
The market managed to close mostly higher Friday, locking in strong weekly gains, with investors hoping that another dismal employment report and a likely economic recession is already priced into stock prices.
Alcoa kicks off season
But this week, attention turns to earnings, starting with Dow component Alcoa Inc., which fell 4% ahead of its earnings after the close. Officially kicking off earnings season, the giant aluminum producer posted a drop in profit amid poor demand from top industrial customers, surging energy costs and a weak U.S. dollar.
Analysts polled by Thomson Financial expect first-quarter earnings for S&P 500 components to drop 12%. Not surprisingly, the financial sector is seen likely to perform the worst, with earnings expected to drop 60%, while energy-sector firms are seen as the best with an anticipated 28% rise.
"What we see is that first-quarter earnings will likely fall below expectations," said Tower of Covered Bridge Tactical. "The market moves on expected future growth, and if the last quarter was worse than expected, that dampens expectations going forward."
"This could be a tough reporting season," he added.
On Monday, trading volumes showed 1.2 billion shares trading on the New York Stock Exchange, with gainers topping decliners by a margin of 3 to 2. On the Nasdaq stock market, 727 million shares traded with decliners topping gainers by 15 to 14.
By sectors, financials, telecoms and utilities led the gains, while materials, information technology and consumer discretionary headed lower. Rallying crude oil futures earlier provided a lift to energy shares. A barrel finished up 2.7% at $109.09 a barrel.
Gold also closed higher, rising $13.60, or 1.5%, to $926.80 an ounce.
The dollar climbed 0.9% against the Japanese yen and was up slightly against the euro.
WaMu's relief, Microsoft's threat
Mortgage lender Washington Mutual is close to a deal to get a $5 billion injection from TPG and other investors, according to a report in The Wall Street Journal. The government was not directly involved in forging a deal, as it did in the recent purchase of Bear Stearns Cos., the report said.
WaMu shares surged 29.3% on the report.
Meanwhile, Microsoft Corp. threatened Yahoo Inc. with a proxy fight as well as a lower offer over the weekend. Yahoo shares fell 1.7%, while Microsoft rose 1%.
UBS rose after Merrill Lynch upgraded the Swiss bank to buy from neutral.
Last week, UBS AG and Lehman Brothers Holdings Inc. said they had lined up investors for a combined $19 billion of new equity that they are issuing, news that helped fuel the week's stock-market advance.
Novartis AG said it is going to pay Nestle $11 billion for nearly 25% of eye-care firm Alcon Inc. at a 3.5% discount to Friday's close, and both firms have an option to require Novartis to buy the remaining 52% that Nestle holds for around $28 billion.
Novartis hasn't committed to making an offer for the 23% of Alcon not held by Nestle.
Kinetic Concepts Inc. said that it is paying $1.7 billion in cash for LifeCell Corp. , an 18% premium to Friday's closing price for the biosurgery firm.
Discover Financial Services announced it would buy Diners Club International from Citigroup for $165 million.
Mining stocks including BHP Billiton and Rio Tinto were stronger after Korea's Posco said it would pay three times as much for coking coal to Australian miners. Goldman Sachs and Citigroup also issued bullish notes on the sector.
DryShips rose 5% after a positive Barron's article on the company.
In other overseas news, Chinese banks were given permission to buy U.S. stocks and mutual funds for the first time.
International stock markets rose, with both the FTSE 100 in London and the Nikkei 225 in Tokyo advancing nearly 1%.
By Nick Godt