Major indices finished in positive territory as retreating oil prices gave investors room to savor upbeat news on

American International Group

(AIG) - Get Report

and a mega oil merger. And as first-quarter earnings start to trickle in, some of Wall Street's big guns say the stage is finally set for an oversold rally.

The

Dow Jones Industrial Average

rose 16.84, or 0.16%, Monday to 10,421.14 -- having briefly fallen below its 2005 closing low of 10,368.21. The

S&P 500

gained 3.20, or 0.27%, to 1176.12, and the

Nasdaq

added 5.5 points to 1979, having touched a new five-month low earlier.

The indices rebounded as crude oil retreated from a fresh high of $58 per barrel, to close down 26 cents at $57.01 on Nymex. And as the gold rush continues in the oil sector,

ChevronTexaco

(CVX) - Get Report

announced it would buy

Unocal

(UCL)

for $16.4 billion in cash and stock.

Overall sentiment was also lifted after New York Attorney General Eliot Spitzer said a "civil resolution" may be achievable in his office's probe into AIG's accounting procedures. Shares of the nation's biggest insurer rose $2.35, or 4.6%, to close at $53.30. They fell by a similar percentage Friday on reports that Spitzer had threatened indictments. AIG's shares have lost 30% since early February, when its legal troubles surfaced.

Guru, Merrill See Rebound

Was the market's uptick just a one-day event? Or has the first-quarter's dismal performance -- the Dow fell 2.4%, the S&P shed 2.5% and the Nasdaq plunged 8% -- set up stocks for a bounce?

Don Hays, chief investment officer of Hays Advisory Group, says he put his cash back in the market at the beginning of last week. Hays says he expects a rally to take place over the next two weeks, taking the S&P 500 back to this year's high of 1229.11 reached on March 7.

Hays' analysis does not dismiss fundamentals but instead tries to figure out when "a wall of worry" has been constructed for the market to "climb on." That time is now, Hays says.

And Hays is not alone. Merrill Lynch had an equally bullish call, saying that both the DJIA and the S&P 500 have the potential to surpass their March highs -- which marked the top of the post-2002 cyclical bull market -- during the second quarter. "Since the major peak in 2000, a difficult first quarter has often been followed by a more robust second quarter," Merrill analysts Walter Murphy and Richard McCabe wrote to clients.

The S&P 500, they add, has had an "up" month of April for 10 of the past 14 years. The index did drop in April 2004. But there has only been two consecutive years of "down Aprils" over the past 50 years.

Both Hays and Merrill, however, warn of further downside after the April rally they foresee fizzles.

"There's a 60/40 chance that, after the rally, the market will go lower than we've been so far this year," says Hays. "This is going to be a year full of concerns, so the market can't get that hot."

Merrill analysts likewise say that historically, the second quarter is "often followed by some of the weakest months of the year."

Back to fundamentals, Hays believes that the

Federal Reserve

keeps "jawboning" the market about inflation, which puts pressure on stocks.

As the first-quarter earnings season starts unfolding, maybe the first-quarter's overarching concerns over soaring crude oil prices and inflation will be put aside.

The stock market did put aside these concerns on Monday, anyway. While crude oil dipped, it did touch a new high, heartening bulls who see it surpassing $60 per barrel. Last week, Goldman Sachs said that the oil market had entered a "super spike" period that could take prices to above $100 a barrel in certain scenarios.

And on the inflation front, the notoriously hawkish St. Louis Fed President William Poole reminded the market over the weekend that the Fed meant business went it mentioned the "I-word" in its March statement. The ensuing market indigestion, he said, was an appropriate reaction to the Fed's message.

Poole does not vote on the rate-setting FOMC. But his comments echo those of Chicago Fed president Michael Moskow, who does vote on rates and who said Friday that the Fed was paying attention to inflation.

Poole's remarks pressured bonds. The 10-year Treasury bond finished down 1/32 in price to yield 4.46%.

The dollar shot higher on Poole's comments, also helped by weak European growth forecasts. The greenback reached a seven-week high against the euro and a five-month high vs. the yen.

Greenspan Speaks

After sending in his henchmen, the Fed chairman will himself take center stage this week. Alan Greenspan is giving a talk at a petroleum conference Tuesday. He will also discuss reform of mortgage holdings at

Freddie Mac

(FRE)

and

Fannie Mae

(FNM)

Wednesday and make another appearance Friday at a consumer finance conference.

Winners and Losers

Wal-Mart

(WMT) - Get Report

said over the weekend that same-store sales rose 4.2% in March compared with a year earlier, up one-tenth of a percent from the 4.1% same-store sales increase put up in February. Brokerage UBS reiterated its buy rating for Wal-Mart, stating that the same-store sales figures won't affect its positive valuation. Wal-Mart gained 42 cents, or 0.9%, to $49.41.

Morgan Stanley

(MWD)

traded higher Monday after a British newspaper, the

Independent

, said

HSBC

is weighing a $70 billion takeover of the U.S. investment bank and brokerage. Morgan Stanley has been the scene of a bitter war of words between CEO Phil Purcell and a group of former investment bankers who believe he has squandered the firm's heritage.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.