NEW YORK (CNN/Money) - U.S. stocks rallied sharply Monday, as investors took a cue from a pair of positive quarterly reports out of the retail sector and broad-based strength in software, networking and chips.

The Dow Jones industrial average gained 212.73, or 2.42 percent, to 8,990.79, its best finish since July 9. The Nasdaq composite rose 33.53, or 2.46 percent, to close at 1,394.54, its highest close since July 17. The Standard & Poor's 500 index added 21.93, or 2.36 percent, to end the day at 950.70.

In a week heavy with retail reports, Tuesday brings quarterly results fromHome Depot (HD: up $0.93 to $29.03, Research, Estimates) and Staples (SPLS: up $0.36 to $16.90, Research, Estimates).

Home improvement retailer Home Depot is expected to have earned 47 cents per share in its July quarter, 20 percent better than the 39 cents earned a year earlier, while office supplies seller Staples is expected to have earned 12 cents per share, 33 percent better than the 9 cents earned in the period a year earlier.

Home improvement retailer Lowe's (LOW: up $4.21 to $41.00, Research, Estimates) said Monday that second-quarter earnings beat Wall Street's quarterly estimates and said that it will meet or beat third-quarter forecasts.

Toy retailer Toys "R" Us (TOY: Research, Estimates) reported a second-quarter loss of 8 cents a share that was narrower than both its loss a year earlier and what analysts had forecast, due to better operating results.

The positive retail mood even managed to distract Wal-Mart Stores' (WMT: up $0.90 to $54.69, Research, Estimates) investors from that company's negative news. The No. 1 retailer said August sales at stores open a year or more are tracking at the low end of its forecast for 4-to-6 percent growth. The Dow component blamed slow back-to-school sales due to the warm weather.

"You're getting quarterly reports and news about August sales this week, and retail stocks have also been beaten down, so you're seeing some strength in the sector," said Dana L. Telsey, a retail analyst at Bear Stearns. "Retailers have managed their second half of the year well, which is positive for back-to-school and Christmas sales, both crucial for the sector."

But the retail sales also are an important factor in encouraging investors concerned about a potential slowdown in consumer spending and how that might affect the economy, and in turn, equity markets.

"Two-thirds of GDP [gross domestic product] is consumer-spending fueled, so signs that it's holding up are supporting the market today [Monday]," Telsey added.

Meanwhile, gains in business software makers such as Oracle (ORCL: unchanged at $10.39, Research, Estimates), Microsoft (MSFT: up $2.00 to $52.00, Research, Estimates) and BEA Systems (BEAS: up $0.67 to $7.09, Research, Estimates) kept the techs high on a broadly positive Nasdaq.

"The market is side-stepping the summer sweats. We're doing a good job of dodging the day's corporate governance bullets," said Bryan Piskorowski, market analyst at Prudential Financial. "But it's going to be a quiet week. A lot of people are on vacation, there's little in corporate reporting or econ data, Congress is still in recess. We lack drama right now, which means we're going to be left to our own devices, which could be good or bad."

Despite the gains, however, market observers were leery of calling an end to the bear market that has plagued Wall Street throughout 2002.

"We're seeing a rally, but it's a summer day and it's typical of a bear market to have these kinds of sharp, short rallies," said Peter Doyle, chief investment strategist at Kinetics New Paradigm Fund. "It's still going to take some time for us to work through what's been testing the markets for months before we can safely say we've hit a bottom and are set to move higher."

A dozen companies whose top executives certified results with the Securities and Exchange Commission last week have failed to comply with standards, according to the commission. The list includes many that are under bankruptcy court protection or have well-known financial problems, as well as a few that are expected to restate past results.

Dynegy (DYN: up $0.60 to $2.29, Research, Estimates) was on the list. However, shares of the troubled energy trader gained after the company said it sold its Northern Natural Gas pipeline for $928 million cash and the assumption of $950 million in debt. Salomon Smith Barney said in a note that this is a substantial positive for the company, which has been in danger of declaring bankruptcy, and should provide a near-term bump in the stock.

The SEC has not yet said whether a number of other high-profile companies that have filed were in compliance with regulations, including CNN/Money parent AOL Time Warner (AOL: up $0.77 to $13.33, Research, Estimates).

Separately, federal prosecutors and SEC attorneys are probing whether the media company's AOL unit engaged in so-called "round-trip" accounting transactions, according to the Wall Street Journal.

In the day's economic news, the Conference Board's index of leading indicators came in mostly in line with forecasts, showing a decline of 0.4 percent in July compared with a decline of 0.2 percent in June.

"Earlier in the summer, the big concern was accounting, but the issue now is whether the economy is going to hold up," Lynn Reaser, market strategist and chief economist at Banc of America told CNNfn's Market Call. "We don't think we are going to have another recession ... We think there is enough stimulus in the pipeline, enough positive news in there to allow the economy to keep on a growth track for the next year."

European markets closed mostly higher, while Asian-Pacific stocks finished mostly lower Monday, with Tokyo's Nikkei index down about 2 percent.

Treasury prices were a little higher, pushing the 10-year note yield down to 4.29 percent. The dollar was stronger versus the yen and euro.

Light crude oil futures rose 29 cents to $28.80 a barrel, while gold was sharply lower.

Market breadth was positive. On the New York Stock Exchange, winners topped losers by more than 2-to-1 as almost 1.27 billion shares traded. On the Nasdaq, advancers beat decliners by 10-to-7 as 1.55 billion shares changed hands.