Stocks fell Tuesday as the Dow and the S&P 500 were on pace to end a four-day winning streak amid renewed concerns about the European banking sector and light post-holiday trading.
TheDow Jones Industrial Averagewas down more than 80 points, with American Express, AIG , and Walt Disney leading the blue-chips lower. McDonald's and Altria rose.
The S&P 500and the Nasdaqwere also lower. The CBOE Volatility Index, the most widely followed gauge of fear in the market, soared above 10 percent to trade above 23.
All key S&P sectors were down throughout the session, with financials, consumer discretionary, and energy stocksleading the way.
The grimmer sentiment comes after stocks capped a strong start to Septemberfollowing better-than-expected jobs and manufacturing reports, and at the start of a week light on economic data.
"We're in a trading range, but this is a holiday-shortened week," Steve Grasso, director of institutional sales at Stuart Frankel said on CNBC. "I want to see real conviction and it will take us another two weeks [where] we're going to get a lot more people on their desks than today."
Volume often starts to pick back up after Labor Day when traders return from summer vacations.
Financials as a group were almost all lower after The Wall Street Journal reported that European bank stress tests were not as comprehensive as they should have been, and some banks hold riskier portfolios than thought.
Banks may also be affected by rumors reported in the German weekly Die Ziet that the Basel committee will require banks to hold 9 percent Tier 1 capital, up from 4 percent. Higher capital levels would put more pressure on big banks.
While these factors were bringing the whole sector down Tuesday, bank stocks have led the market higher as well as lower since the financial crisis, said Frederick Cannon, chief equity strategist at Keefe, Bruyette, & Woods.
Traditionally, financials were "fairly stable stocks," in part because they paid good dividends, Cannon said. That's no longer the case, and financials have tended to be volatile, he said.
Bank stocks were mostly in the red, with giants Citigroup , JPMorgan and Wells Fargo down more than 2 percent each.
Barclays said the head of its investment bank, Bob Diamond, would be its next chief executive. Shares of the bank tumbled almost 6 percent.
And HSBC Holdings Chairman Stephen Green is stepping down to become U.K. Trade Minister of State for Trade and Investment, a post vacant since last May. Green's replacement has not been named.
AIG slipped more than 2 percent after the insurer said it hopes to raise about $15 billion for its Asian life insurance unit, and is seeking approval from a Hong Kong committeeto list its initial public offering for sale on Sept. 21, according to Reuters. The move will allow AIG to repay taxpayers for propping up the insurance giant during the financial crisis.
Mining and minerals stocks were under pressure following news that authorities in China have asked several steel companies to suspend production for several days to ease energy use concerns in the country, said Schrader at Stifel Nicolaus.
"I'm not saying it's 100 percent due to the news in China, but a significant portion," said Tom Schrader, managing director for U.S. Equity trading at Stifel Nicolaus Capital Markets. "The strong dollar is also hurting commodity plays."
Cliff Natural Resources and Cameco both fell. But U.S. steelmakers appeared to benefit from the news with Nucor , U.S. Steel and AK Steel advancing.
Gold rose above $1,257 an ounce— its highest since late June — as investors bought the metal as a safe haven play. Meanwhile, oil fell 0.7 percent to $74 a barrel.
Schlumberger fell slightly after Goldman Sachs added the oil services firm to its buy list with a price target of $68.