Stocks largely declined despite an afternoon surge in technology stocks amid rekindled European debt worries and as investors awaited the start of the earnings season.
The Dow Jones Industrial Average fell more than 30 points, following a week that ended with the major indexes falling in the wake of a disappointing December jobs report.
AT&T, DuPont and Microsoft led blue-chips lower, while Travelers rose.
The S&P 500 fell slightly while the tech-heavy Nasdaq advanced modestly. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 18.
Among S&P 500 sectors, telecom, utilities and energy fell, while technology and industrials gained.
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, according to TrimTabs Investment Research and BarclayHedge.
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.
Meanwhile, the Federal Reserve will turn over a record $78.4 billionto the Treasury Department, $31 billion more than a year ago, as securities portfolios generated huge profits in 2010, according to the U.S. central bank.
And Atlanta Federal Reserve Bank President Dennis Lockhart offered some optimistic comments that the economy is seeing signs of a recovery. He also said he remained comfortable with his decision early in November to support the quantitative easing program.
"(T)he economy seems to have gained durable momentum as we begin 2011," Lockhart said in comments prepared for delivery. "While things are looking better, I don't expect a quick fix."
A flurry of M&A activity took center stage. In a development Monday afternoon, Dominion Resources made a last-minute offer to buyboth Duke Energy and Progress Energy, according to a CNBC report. Duke Energy had reached a deal to buy Progress Energy for $46.13 a share to create the nation's largest energy company. The Virgina-based Dominion said it would buy each at a 10-to-15 percent premium to their stock prices, CNBC said, citing people familiar with the situation.
including DuPont , which 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.
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 gained after the food producer was rumored to be target of an acquisition by private equity firms including Apollo Global Management.
Verizon advanced slightly amid news the wireless carrier may announce plans this week to sell Apple's iPhone, giving a boost to the tech giant. Some analysts believe the move could be critical for Apple. Shares of AT&T fell on the news and as Hudson Square Research downgraded the wireless giant to "hold" from "buy."
Meanwhile, Standard Microsystems plunged almost 10 percent after the chipmaker said it would acquire Conexant Systems for about $200 million in a cash-and-stock deal, in an aim to strengthen its foothold in the automotive and industrial markets. Conexant shares bounced roughly 15 percent.
Also in the semiconductor sector, AMD shares gained after Nomura and Morgan Stanley boosted their ratings on the tech firm to "buy" from "neutral" and "equalweight" from "underweight," respectively.
FBR also raised price targets for several semiconductor stocks, including Semiconductor to $15 a share from $13 and Qualcomm to $55 a share from $51. Nvidia's shares, meanwhile, also gained after FBR raised the semiconductor company's price target to $16 a share from $14, and Wedbush raised its price target to $18 a share from $10.
The price of oil gained to close at $89.25 a barrel after a major Alaskan pipeline shut down. But energy stocks declined, including BP , which was among the oil producers forced to shut the pipeline down.
ExxonMobil and Valero Energy also slipped after both oil giants 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.
Bank of America advanced, while most other big banks and brokerages, including JPMorgan, Goldman Sachs and Morgan Stanley slid. JPmorgan will be releasing earnings on Friday.
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, the 19 largest banks were bracing for a new round of stress tests, which will determine whether the banks can buy back stock or raise dividends in coming months.
Also, 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 were lower across the board, including Humana , Beckton Dickson and Eli Lilly .
Meanwhile, Genzyme shares rose after the biotech firm confirmed that discussions are ongoing between its financial advisors and financial advisors from French drugmaker Sanofi-Aventis .
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. (Click on the badge to see CNBC's complete coverage of the Detroit Auto Show.)
Goldman Sachs upgraded Target to "buy" from "neutral," and downgraded Wal-Mart to "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.
Shares of CME Group advanced after Bernstein Research raised its rating on the futures exchange to "outperform" from "market perform," and pushed its price target to $420 a share from $315, citing the improving economy and tighter monetary policy.
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.
KBHomes sank after Credit Suisse cut the homebuilder to "underperform" from "neutral," saying it expects margins for KBHome to narrow. But KBW raised the company's price target to $16 a share from $14.
And 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.
Gold prices rose slightly to close at $1,373.70 an ouncewhile the dollar was largely flat against the euro and yen. Comex Gold for January delivery gained $5.20 per troy ounce today, or 0.38%, to $1373.70
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. (Read more: Dennis Gartman: Euro Crisis a 'Virulent Disease.")
On Tap This Week:
MONDAY: 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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