Worries about Europe gave stocks agita Monday for the first time in months, and it may be the excuse to take profits from the new year rally.
The Dow Jones Industrial Average saw its worst decline since late December, falling 129 points, or 0.9 percent to 13,880, while the S&P 500 slipped more than 1 percent to 1495. The Dow is up nearly 6 percent year-to-date, and the S&P is up about 5 percent. The Nasdaq, dragged down by tech, lost 1.5 percent Monday to 3131, and is now up 4 percent for the year.
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"I think we're due for a modest say, five percent pullback in the market," said Jeff Kleintop, chief investment strategist with LPL Financial. "Whether we've seen the start of that today ,with a one percent move, or whether we bounce back and it is yet to come. … February is a good month for it to happen."
Spain and Italy were the culprits, and their stock markets saw sharp losses as investors focused on reports of a corruption scandal involving Spanish Prime Minister Mariano Rajoy and on uncertainty over the outcome of the Italian election this month. The focus will remain on Europe later in the week as well, when the European Central Bank meets Thursday. The euro was slightly lower but held above 1.35, after last week's big move higher.
"It's been the tone for the last two or three years. Europe hits us somewhere in the spring," said Kleintop. "We kind of pull higher later in the year ... it's a different type of risk in Europe. It's not so much a financial crisis, it's economic. But it still echoes the same thing. It's still ground hog day."
(Read More: Why the Euro Seems Headed for a Fall)
Barry Knapp, head of equity portfolio strategy at Barclays, said the market is ripe for a pullback, but it may not be just yet. Working against it are earnings revisions. "Earnings are beating in the current quarter but expectations are coming down," he said. Knapp said the market may make another run at the highs before pulling back.
Both the S&P and Dow crossed important psychological hurdles recently, and analysts have said that 1500 on the S&P and 14,000 on the Dow may be reason enough for the market to pause. All-time highs are close at hand — 14,164 for the Dow, for one. "I think there's a pretty good case for things being better in the second half," said Knapp. "I wouldn't be surprised if we've seen the highs for the first half. Maybe we have another new high in here, but I do think the market has overshot the fundamentals."