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Stocks close lower; Dow, S&P 500 log first drop in 4 days

Stocks eased off their lows but still closed in the red in lackluster trading Tuesday a day after the Dow and S&P 500 hit fresh highs.

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The Dow Jones Industrial Average fell 21.29 points to close at 16,722.34, dragged by Verizon. The blue-chip index has been trading in a narrow 47-point range throughout the session.

The S&P 500 dipped 0.73 points to finish at 1,924.24. The Dow and S&P 500 snapped a three-day winning streak. The Nasdaq slipped 3.12 points to end at 4,234.08.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded above 12.

Among key S&P sectors, telecoms led the laggards.

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Stocks initially pared their losses after a better-than-expected factory orders report. New orders for factory goods climbed 0.7 percent in April, rising for a third-straight month and topping expectations for 0.5 percent.

"We've had some hesitation this morning but factory orders looked a bit better than expected and seemed to give a little more life into the market," said Todd Salamone, director of research at Schaeffer's Investment Research. "There's still a lot of data coming out later in the week—a lot of eyes are on the ECB."

Investors will be looking ahead to the monthly nonfarm payrolls report on Friday. Economists expect to see 218,000 jobs added in May and a 6.4 percent unemployment rate, according to a Reuters poll.

General Motors and Ford gained after both automakers reported sales that rose above estimates in May. Japanese rival Toyota also topped sales estimates.

Read MoreAt least 74 deathsmay be linked to GM switches

Tesla CEO Elon Musk said he plans to stay at least another 4 to 5 years as the chief of the electric car company, according to Dow Jones. Tesla is holding its annual shareholder meeting Tuesday.

Pilgrim's Pride confirmed a revised proposal to buy Hillshire Brands for $55 a share, an offer that values the company at $7.7 billion. The offer came after Tyson Foods offered to buy Hillshire for $6.3 billion last week. Hillshire said it would conduct talks with both parties.

AT&T lifted its full-year revenue guidance, due in part to strong trends in its wireless business. Still, shares were in the red. Rival Verizon also traded lower.

J.M. Smucker raised list prices on most of its U.S. packaged coffee, primarily Folgers and Dunkin' Donuts brands, for the first time since 2011 due to soaring green coffee costs.

Among earnings, Dollar General posted earnings that missed by a penny, with revenue also short of consensus, citing poor winter weather and a competitive environment, among other factors.

Krispy Kreme tumbled more than 10 percent after the doughnut maker missed quarterly sales and cut its full-year earnings guidance.

And Quiksilver plunged nearly 40 percent after the teen apparel retailer posted a wider-than-expected loss. (Click here for CNBC's full earnings coverage)

"One area of the market that hasn't benefited from the asset value melt-up over the last several years has been commodities," said Jack Ablin, chief investment officer at BMO Private Bank. "While stock and bond markets continued to surge, the Dow Jones UBS Commodities Index has been losing ground since 2011...Notwithstanding the pullback, commodities now appear to be a more interesting asset class...While we do't expect a replay of the commodity bull run, we do believe that having a commodity allocation in a broadly diversified portfolio will enable investors to mitigate some of their other market risks."

Read MoreCramer: Have stocks become new commodities?

Overnight, an HSBC survey showed that China's factory sector put in its best performance in four months in May as export orders rebounded, although activity remained in contraction territory.

European and Asian shares failed to rise on the news, which was already priced in following Monday's positive official manufacturing data from China.

Traders in Europe remain cautious ahead of Thursday's European Central Bank Governing Council meeting. Many economists expect President Mario Draghi to announce policy measures to combat low inflation, such as interest rate cuts, cheap loans to banks or even Federal Reserve-style asset purchases.

Read MoreHow to trade the euro ahead of Draghi decision

In addition, President Barack Obama will begin his European trip with meetings in Poland to discuss security issues regarding Russia. Obama is also expected to meet with Ukrainian President-elect Petro Poroshenko.

—By CNBC's JeeYeon Park

Coming Up This Week:

WEDNESDAY: Mortgage applications, ADP employment report, international trade, productivity & costs, ISM non-mfg index, oil inventories, Beige Book, G7 meeting
THURSDAY: Challenger job-cut report, jobless claims, Fed's Kocherlakota speaks, chain store sales, ECB mtg; Earnings from JM Smuckers, Joy Global, Diamond Foods
FRIDAY: Nonfarm payrolls, consumer credit, Wal-Mart shareholders mtg

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