Wall St rebounds but cautious sentiment prevails on Fed

By Angela Moon

NEW YORK (Reuters) - U.S. stocks gained on Monday, rebounding from their worst week in months as large deals boosted optimism but investors remained cautious ahead of an upcoming Federal Reserve policy meeting.

Equities are coming off their biggest weekly decline in nearly four months, a pullback that came on concerns the Fed may begin to wind down the bond-buying stimulus at its two-day policy-setting meeting that ends Wednesday.

The CBOE Volatility index VIX, Wall Street's so-called fear gauge which usually moves inversely to the performance of the S&P 500, was up 1.3 percent at 15.96.

"Implied volatilities increased across asset classes last week as investors priced in a possible taper at this week's FOMC meeting," said Mandy Xu, equity derivatives strategist at Credit Suisse, adding that equity volatility gained the most.

The stimulus has been a major contributor to the market's gains this year, and has been expected to keep a floor under stock prices for as long as it continues.

Investors have been trying to gauge the timing of when the central bank will start winding down its market-friendly bond purchases, with many market participants expecting the Fed to announce a tapering in March.

However, stronger economic data of late, including the November payroll report, led some to believe the tapering could come as soon as at the Fed's meeting this week. The Fed has said it will slow the program when certain economic indicators meet its growth targets.

"Traders should expect lots of volatility and uncertainty as this announcement approaches," said Randy Frederick, managing director of active trading and derivatives at the Schwab Center for Financial Research.

"There is little consensus whether good news is good or bad right now, with the indicators that I watch showing everything from fully bearish to fully bullish."

In M&A news, Avago Technologies Ltd agreed to buy LSI Corp for $6.6 billion, while American International Group Inc said it would sell its aircraft-leasing business to AerCap Holdings NV in a deal valued at about $5.4 billion.

Shares of Avago jumped 9 percent to $49.72 while LSI surged 39 percent to $10.96. AerCap surged 36 percent to $33.98 and AIG rose 1.2 percent to $50.32.

The Dow Jones industrial average rose 118.54 points or 0.75 percent, to 15,873.9, the S&P 500 gained 9.53 points or 0.54 percent, to 1,784.85 and the Nasdaq Composite added 23.815 points or 0.6 percent, to 4,024.79.

The S&P 500 fell below its 14-day moving average on Wednesday and has not risen above it since, a sign of weak near-term momentum. However, the benchmark index is less than 2 percent below its record closing high, indicating that recent selling has not been panic-driven.

Twitter Inc briefly hit a new all-time high of $60.20 but was down 2.2 percent to $57.73 near midday trade.

Procter & Gamble plans to reorganize its overseas business as part of Chief Executive A.G. Lafley's plans to cut costs, according to a Bloomberg report that cited three unidentified people briefed on the matter.

In economic data, U.S. manufacturing output rose for a fourth straight month in November as production increased almost across the board, in the latest suggestion the economy is gaining steam.

(Reporting by Angela Moon; Editing by Theodore d'Afflisio and Nick Zieminski)