Stocks came off their lows but still finished in negative territory Monday, pulling back after last week's sharp rally that drove the S&P 500 to its best closing level in nearly five years and ahead of the fourth-quarter earnings season.
The Dow Jones Industrial Average slid 50.92 points, or 0.38 percent, to end at 13,384.29, led by Walt Disney and Boeing, after soaring more than 3 percent in the previous week.
The S&P 500 declined 4.58 points, or 0.31 percent, to finish at 1,461.89. The Nasdaq erased 2.85 points, or 0.09 percent, to close at 3,098.81.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed below 14, extending losses after plunging nearly 40-percent last week.
Most key S&P sectors finished in negative territory, led by energy and utilities.
Stocks kicked off the first trading week of the year with a bang, with the S&P 500 posting its best closing high since December 2007 and all three major averages logging their best weekly gains since December 2011, following the "fiscal cliff" deal and after a better-than-expected ISM non-manufacturing index and a monthly government jobs report. (Read More: Stronger Economy, Not Fed, Driving Stocks—Pros )
"It looks like we're catching our breath as we head into fourth-quarter earnings," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "We're seeing some very similar action to last year where expectations are low and you already have a lot of negativity out there. So any good news at all could be a potential catalyst for equities."
Aluminum producer Alcoa is scheduled to post results on Tuesday, while banking giant Wells Fargo reports on Friday. Earnings are expected to be slightly better than the previous quarter's lackluster results and analysts' current estimates are down sharply from what they were in October. (Read More: Wall Street Opens Big in 2013, Now Brace for Earnings )
"We've also been encouraged by the small-caps and mid-caps hitting new highs—those are very bullish signs," said Detrick.
Apple fell after Barclays lowered its price target on the iPhone maker to $740 from $800. Apple shares have plunged more than 25 percent since hitting an all-time high of $705 a share last September.
Netflix rallied near $100 a share after the movie-streaming company announced a licensing agreement with Warner Bros. Television Group.
Boeing declined after a 787 Dreamliner aircraft caught fire at Boston's Logan International Airport while parked at a gate. No passengers were on board. No injuries were reported.
Disney dropped amid reports that the conglomerate started an internal cost cutting review several weeks ago that may include layoffs at its studio and other units, according to Reuters.
Bank of America slipped even after the financial giant reached a $10 billion settlement with Fannie Mae over mortgage repurchases. Separately, the Basel Committee for Banking Supervision, a group of the world's top regulators and central bankers, agreed to give banks four more years to build up cash reserves.
Amazon climbed to an all-time high after Morgan Stanley upgraded the online retailer to "overweight" from "equal weight." Intel rose after Lazard called the chipmaker a "buy."
But Yahoo fell after Bernstein downgraded the Internet company to "market perform," though it did raise its price target by one dollar to $23.
Clashes continue over tax increases on the wealthiest Americans over the weekend. In separate TV appearances on Sunday, Senate Minority Leader Mitch McConnell, a high-profile Republican, and Nancy Pelosi, leader of the Democrats in the House of Representatives diverged over whether further tax rises were on the cards. While McConnell completely ruled out raising tax revenue, Pelosi refused to rule out pushing for higher taxes on higher earners.
"The fiscal cliff concerns will continue to flare up and cause concern, but it seems like the markets are more forward looking," said Detrick.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
TUESDAY: NFIB small business optimism index, 3-yr note auction, consumer credit, International Consumer Electronics Show; Earnings from Alcoa, Apollo Group
WEDNESDAY: Weekly mortgage applications, oil inventories, 10-yr note auction; Earnings from Constellation Brands, PriceSmart
THURSDAY: Jobless claims, wholesale trade, natural gas inventories, Fed's George speaks, 30-yr bond auction, Fed's Bullard speaks, Fed's balance sheet, money supply, Fed's Kocherlakota speaks, Herbalife analysts day, videogame sales data release; Earnings from Chevron (interim report), Ruby Tuesday
FRIDAY: International trade, import and export prices, Fed's Plosser speaks, Treasury budget, Best Buy to report holiday sales; Earnings from Wells Fargo
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