Stocks fell as investors awaited the start of the earnings season and shrugged off a spate of mergers and acquisitions activity.
The Dow Jones Industrial Average fell more than 60 points, after a week that ended with the major indexes falling in the wake of a disappointing December jobs report.
DuPontAT&T and Microsoft led blue-chips lower, while GE rose.
The S&P 500 and the Nasdaq also declined. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 18.
Most key S&P 500 sectors slipped, led by utilities, energy and telecom.
Monday's market weakness may also reflect some hesitance on the part of investors ahead of earnings this week, first from Alcoa after the closing bell, and later this week from Intel , said Ryan Detrick, senior technical analyst at Schaeffer's Investment Research.
"There's a little bit of trepidation ahead of those numbers and rightfully so," Detrick said.
While Detrick expects the market will move higher this year, and that generally, investors expectations on the economy and the market are too low, he said the market is overbought at current levels. "Earnings season could be next major driver going forward," he said.
In one bullish sign for the markets, money appears to be returning to hedge funds as well as stock mutual funds. "I do think that’s a good sign," Detrick added.
About $13 billion flowed into hedge funds in November, representing the fifth straight month of inflows, and the most since February 2010, TrimTabs Investment Research and BarclayHedge said Monday.
Equity long-short funds attracted the most cash with $2.5 billion flowing into those funds, TrimTabs and BarclayHedge said. According to the firms, hedge funds returned 11.6 percent in 2010, which is less than the 12.8 percent gain of the S&P 500 last year.
In M&A activity, DuPont offered to buy Danish food ingredients and enzymes firm Danisco for $5.8 billion. The U.S. chemicals firm plans to use the deal to boost its position in the food sector.
Duke Energy reached a deal to buy Progress Energy for $46.13 a share to create the nation's largest energy company. The deal represents a modest 4 percent premium over Friday's closing price for Progress.
Johnson & Johnson reportedly approached Smith & Nephew to buy the European maker of replacement knees and hips, but was rejected. Smith & Nephew's ADRs gained.
And Sara Lee may be the target of an acquisition by private equity firms including Apollo Global Management.
Verizon rose slightly Monday amid news the wireless carrier may announce plans to sell Apple's iPhone this week, giving a boost to the tech giant. Some analysts believe the move could be critical for Apple.
The price of oil rose after a major Alaskan pipeline shut down. But energy stocks fell, including BP , which was among the oil producers forced to shut the pipeline down.
Exxon Mobil and Valero Energy also fell after they were downgraded by Barclays to "equal weight" from "overweight."
UBS, meanwhile, upgraded the financial sector to "overweight" from "market weight," saying financials should do well because of improving loss trends, a rise in loan demand, a steeper yield curve and attractive valuations. The brokerage said large banks and brokers will benefit most from the trends.
On Monday, Bank of America was slightly higher, while most other big banks and brokerages, including JP Morgan, Goldman Sachs and Morgan Stanley fell.
The sector was hit hard on Friday and remained under pressure Monday after news Massachusetts' top court ruled Wells Fargo and US Bancorp failed to show they held mortgages when they foreclosed on two homes.
Meanwhile, FBR cut Wells Fargo, Sterling Financial and Flagstar Bancorp to "market perform" from "outperform."
UBS also downgraded the health care sector to "market weight" from "overweight" citing concerns with patent expirations for some pharmaceutical companies as well as uncertainties surrounding implementation of health care legislation.
Most health care stocks fell on Monday, including Humana , Beckton Dickson and Eli Lilly .
General Electric rose after UBS added the diversified manufacturer (and parent of CNBC) to its U.S. "key calls" list, but Ford slipped despite also being added to the list.
Goldman Sachs upgraded Target to "buy" from "neutral," and downgraded Wal-Mart from "neutral" from "buy."
For-profit education stocks got hit after Strayer Education cut its 2011 outlook, saying enrollment for the winter term fell by 20 percent from a year earlier. Apollo Group , Corinthian Colleges , and Capella Education also fell.
Playboy shares soared after news the magazine's founder, Hugh Hefner,plans to take the company private, through his firm Icon Acquisition Holdings. Rizvi Traverse Management will also participate in the deal, valued at about about $207 million.
In IPO news, Crumbs Bake Shop, the country’s largest cupcake chain, plans to go publicthrough a $66 million merger with an investment company, the 57th Street General Acquisition Corporation.
The price of gold was little changed while the dollar was largely flat against the euro and yen.
European shares ended sharply lower as concerns over the region's debt situation returned to weigh on investor sentiment.
Portugal was in focus as Germany and France pressure the struggling country to seek financial help from the European Union and International Monetary Fund to stop the bloc's debt crisis from spreading. The yield on Portuguese debt rose even after word that the EU was buying Portuguese bonds in the secondary market.
Asian stocks were lower after data showed China's 2010 trade surplus narrowed for the second year in a row. Japanese indexes closed flat, while Taiwanese and Australian stocks managed slight gains.
At 12:40 pm New York time, Atlanta Federal Reserve President Dennis Lockhart will discuss the economic outlook when he speaks in Atlanta.
And the decline in layoffs is giving people with secure jobs the confidence to go out and spend more, which is boosting retail sales, analysts told the Associated Press.
On Tap Next Week:
MONDAY: Atlanta Fed President speaks, National Retail Federation Retail Show, Detroit Auto Show; after-the-bell earnings from Alcoa.
TUESDAY: National Federation of Independent Businesses Small Business Optimism Index, Philadelphia and Minneapolis Fed Presidents speak, wholesale trade, 3-year Treasury note auction; before-the-bell earnings from Lennar, Chevron interim results.
WEDNESDAY: Weekly mortgage applications, imports-exports price indexes, oil inventories, 10-year Treasury note auction, Federal Reserve’s Beige Book, Federal Reserve Chairman Timothy Geithner speaks; Dallas Fed President speaks.
THURSDAY: Bank of England and European Central Bank announcements, international trade, PPI, jobless claims, 30-year Treasury bond auction; after-the-bell earnings from Intel.
FRIDAY: CPI, retail sales, industrial production, consumer sentiment, business inventories, Richmond Fed president speaks; before-the-bell earnings from JPMorgan.
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