Stocks ended flat on Friday after spending the majority of the trading session in negative territory, as investors moved to the sidelines ahead of a long holiday weekend.
"People don't want to buy or add to positions ahead of the three-day weekend," said Charles Rotblut, senior market analyst at Zacks.com, in an interview with CNBC.com. "We had a good week and I actually thought there would've been more profit taking."
U.S. markets will be closed Monday in observance of Presidents' Day.
There will be few market-moving events during the holiday-shortened week, aside from earnings reports from Hewlett-Packard, Home Depot and Wal-Mart and the release of the Fed minutes.
"Sentiment points towards a higher market but I expect a pullback sooner than later," Rotblut said. "I don't think it will be a correction of 10% but we will see a pullback in the markets."
The S&P 500 and the Nasdaq ended Friday down slightly but basically flat while the Dow Jones Industrial Average closed just above the unchanged mark in the last 10 minutes of trading. The Dow traded all day in a very narrow range of 25.15 points, the tightest range for the blue chip index since March 1997.
A 2.4% decline in shares of tech giant Microsoft weighed on the Dow on Friday. Microsoft CEO Steve Ballmer said late Thursday that analysts' sales predictions for Windows Vista were too aggressive.
Also affecting the Dow was a news report that said General Motors was in talks to buy Chrysler from its German parent, DaimlerChrysler, .
CNBC's Phil LeBeau said there doesn't appear to be any serious negotiations for such a move.
As was the case all week, trading volume was light on the New York Stock Exchange and breadth was mildly negative, with declining shares outpacing advancers by small margin on the New York Stock Exchange. For the week, the Dow and the Nasdaq each closed with cumulative gains of 1.5% while the S&P rose 1.2%.
"What we're seeing is a little pullback after a nice run," Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics, told CNBC.com. "The usual scares tend not to derail a rally, it's usually something out of left field. My best guess is that it's something people are not anticipating."
Trading activity was also affected by Friday's options expiration; the Dow has traded down on the expiration day leading up to President's Day in five of the last seven years and the S&P has gained just eight times in the last 31 years, according to the Stock Trader's Almanac.
"You're seeing a lot of red on the screen, but today's action is really a blip," Michael Sheldon, chief market strategist at Spencer Clarke, told CNBC.com. "We've had a tremendous broad-based advance over the last several months, so I wouldn't be surprised to see a little profit-taking among investors who have seen gains."
Telecom stocks led winners among S&P sectors Friday while the industrials were the day's loser. Stocks were swayed by mixed economic data this morning, including data which showed that housing starts fell to close to a ten-year low.
The Commerce Department said homebuilders started the fewest homes in nearly a decade in January. The rate of groundbreaking on new homes fell by 14.3%, a much sharper decline than the 2.6% forecast. The rate was the lowest since August, 1997.
"I think housing is going to force the markets down a little bit," said Warren Meyers, a trader with Walter J. Dowd, appearing on CNBC. "I think when people look at the number and digest it, they'll see there's a lot of noise in there with the weather. So, I think the overall down impact won't be as great as some people initially thought."
The Labor Department said the January producer price index declined 0.6% overall and the core rate, which excludes food and energy, rose 0.2%--in line with expectations. Investors were encouraged by a deceleration in the core rate of 1.8% year-over-year.
Treasury prices extended their gains, sending yields lower, in reaction to the plunge in housing starts.
While the earnings season is drawing to a close, there was plenty of transatlantic merger activity and speculation to move individual shares.
Shares of American Airlines parent AMR rose on speculation of a potential takeover. Business Week said today a group led by British Airways and Goldman Sachs may be considering making a bid for the U.S. carrier. But analysts were skeptical.
Simon Property Group and hedge fund Farallon Capital Management will acquire real estate investment trust Mills Corp. for $25.25 a share in cash.
Dow component Honeywell said its board has approved a new $3 billion stock buyback program.
New York light crude futures rose despite forecasts for warmer weather in the northeastern section of the U.S., the world's largest market for home heating oil. Traders also mulled over news that OPEC production output had declined, but was still above agreed cutbacks.
European Stocks Close Down, Asia Mixed
London's FTSE-100 closed lower and Germany's DAX ended with a modest decline after federal officials said consumer prices rose by 1.6% in January while the consumer price index declined by 0.2%. In Paris, telephone directory services firm Pages Jaunes reported a 13.4% rise in 2006 net profit and announced a 6% dividend increase. The CAC-40 closed with a small loss.
Asian markets were mixed with Japan's Nikkei 225 Average snapping a five-session winning streak as investors took profits on real estate stocks such as Mitsubishi Estate. The yen strengthened against the U.S. dollar after a surprising decline in U.S. industrial output last month, which weighed on shares of some major exporters.
The Kospi Index ended higher in Seoul as the South Korean benchmark index closed at a nine-month high. Hong Kong blue chips held steady as investors stayed away ahead of the Lunar New Year holidays despite another record close on Wall Street, but an analyst's upgrade buoyed China Telecom.