(Updated with stock prices.)

NEW YORK ( TheStreet) -- The major stock averages recovered after another volatile day Monday as the market goes through what one observer calls a transition period.

The Dow Jones Industrial Average gained 76.71 points, or 0.8%, to 9789.44, while the S&P 500 added 6.69 points, or 0.7%, to 1,042.88. The Nasdaq edged up 4.09 points, or 0.2%, to 2049.20.

Stocks advanced early after a trio of positive surprises economic reports, but gave up those gains by midday only to recover with a buying spree in the final hour.

"We are going through a transition," says Jeffrey Kleintop, chief market strategist, LPL Financial. "In the summer we were going from pricing in the great depression to a recession, now we've been here for a month and a half as we go from pricing in a recession to a recovery," he says.

"We're in this consolidation around 1050 on the S&P 500 , and it may go a few more weeks, but we've seen a lot of volatility, and it's tough to put your finger on what drove that," he added.

The CBOE volatility index, considered a reading on fear in the market, was at times above 30, a level that raises some eyebrows.

Adding to the midday pressure, Jon Greenlee, associate director of the Fed's Division of Banking Supervision and Regulation, said U.S. banks are at risk of large new loan losses, particularly on commercial property.

Greenlee said in prepared testimony prepared for a House of Representatives Oversight and Government Reform subcommittee that some banks may not have adequate capital to cushion against losses, CNBC reported.

The dollar also fought to recover from early weakness, leading to some midday selling.

Financials were again among the midday decliners, but the KBW Bank Index recovered and ultimately gained 0.9%.

American Express ( AXP), Bank of America ( BAC) and JPMorgan Chase ( JPM) were all in positive territory on the Dow.

Data earlier in the day inspired a more-than-100-point gain in the Dow. The Institute for Supply Management's index on manufacturing rose to 55.7 in October from 52.6, topping expectations for 53, marking the third consecutive monthly gain and the highest rate of growth since April 2006. The rise was driven by "significant" gains in production and employment.

"Production appears to be benefiting from the continuing strength in new orders, while the improvement in employment is due to some callbacks and opportunities for temporary workers," said Norbert Ore, chair of the Institute for Supply Management Manufacturing Business Survey Committee. "Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode."

It's a Halloween surprise, says Brian Bethune, chief U.S. financial economist at IHS Global Insight. "I think that especially in the manufacturing sector what is happening is there's some export demand that's pretty strong and also my sense of it is that there's this undercurrent in the high-tech sector even though some numbers seem to be contradictory -- production for high-tech was good but orders and shipments data weren't," he says.

At the same time, pending home sales offered a big upside surprise, rising 6.1% vs. expectations for no change, and construction spending rose by 0.8%, vs. expectations for a slight decline.

The most highly anticipated data of the week, the government's unemployment report, will come out Friday.

In other news, Ford -- up more than 8.3% early -- easily topped estimates, reporting a surprise fourth-quarter profit of 29 cents a share, on better than expected revenue of $30.9 billion.

Last week, the major averages lost more than 2.5% each -- the biggest one-day drop since July -- on Friday as a stronger dollar, soft consumer spending report and fears about the rally's sustainability took hold.

On the other hand, CIT Group ( CIT) filed for bankruptcy protection over the weekend, after a proposed debt exchange to bondholders failed. Shares gave up 65.3% to 25 cents.

Meanwhile, Denbury Resources ( DNR) will buy Encore Acquisition ( EAC) for $3.2 billion in cash and stock. Those stocks were down 10.3% and up 20.5%, respectively.

Stocks overseas were mixed, with the FTSE in London up 1.2% and the Dax in Frankfurt up 0.3%. In Asia, Japan's Nikkei and Hong Kong's Hang Seng were down 2.3% and 0.6%, respectively.

-- Written by Elizabeth Trotta in New York.