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The markets dramatically pared down gains on Monday afternoon as traders interpreted mixed signals about when the Federal Reserve will begin cutting back on bond buying.

Today's Markets

As of 2:55 p.m. ET, the Dow Jones Industrial Average jumped 42.5 points, or 0.28%, to 15112, the S&P 500 gained 3.6 points, or 0.22%, to 1631 and the Nasdaq Composite climbed 14 points, or 0.41%, to 3438.

The S&P 500 shed 1% last week in volatile trading as market participants obsessed over the Federal Reserve's strategy to exit its vast bond-buying program. Expectations that the world's most powerful central bank could begin slowing asset purchases in coming months have roiled fixed income markets in a move that has ricocheted into equities. 

The Fed is expected to stay in the spotlight this week, with the central bank kicking off a two-day meeting concluding on Wednesday. 

"I expect next to no change in the FOMC statement," said Michael Block, chief strategist at Rhino Trading Partners. "In the press conference, (Fed Chairman Ben) Bernanke will play up how tapering purchases down the road is not the same as raising rates, which is so far down the road that investors should not worry about it." 

Block pinned the move higher on Monday to investors preparing for the meeting on Wednesday, along with a calming in fixed income and currency markets. 

Still, the upward movement lost most of its momentum after the Financial Times reported Bernanke is likely to signal the central bank is "close to tapering" the $85 billion a month it buys in bonds. 

The yield on the 10-year Treasury bond fell 0.02-percentage point to 2.115% as traders bid up the asset. Elsewhere, U.S. oil prices continued moving toward the $100 a barrel mark as tension heated up in Syria. The benchmark contract recently climbed 41 cents, or 0.42%, to $98.25 a barrel. Wholesale New York Harbor gasoline was flat at $2.897 a gallon. In metals, gold fell $4, or 0.29%, to $1,384 a troy once. 

The economic calendar is fairly light on the day. 

The NAHB/Wells Fargo Housing Market index surged to 52 from 44 in May, easily topping forecasts for 45. This is the first time the index has been above 50 since April 2006, suggesting more homebuilders view conditions as favorable than those who see them as poor for the first time since the housing crisis. 

The New York Fed's regional manufacturing gauge surged to 7.8 in June from -1.4 the month prior, easily exceeding expectations of 0. Reading above 0 point to expansion for the Empire State factory sector, while those below indicate contraction. 

Still, while the headline number was strong, economists noted many of the sub-indices were less rosy: "The unexpected improvement in the Empire State Index was not reflected in the details," Steven Ricchiuto, chief economist at Mizuho Securities USA, wrote to clients. "Details paint a much weaker picture than the headline."

Foreign Markets

The Euro Stoxx 50 jumped 1.5% to 2706, the English FTSE 100 advanced 0.75% to 6355 and the German DAX rallied 1.2% to 8228. 

In Asia, the Japanese Nikkei 225 surged 2.7% to 13033 and the Chinese Hang Seng zoomed 1.2% to 21226.

Follow Adam Samson on Twitter @adamsamson.