The Dow transports closed down 0.7 percent after earlier falling more than 1 percent with Kirby leading nearly all constituents lower. The index broke a four-day win streak and is down more than 17 percent year-to-date, on pace for its worst year since 2008.
"Transports have come back. We're beginning to lift in spite of oil prices near their lows of the day," said Peter Cardillo, chief market economist at First Standard Financial. There's some "bargain hunting coming into transports."
Oil remained near multi-year lows as U.S. crude struggled to hold its premium to the internationally traded Brent. U.S. crude oil futures settled down $1.29, or 3.39 percent, at $36.81 a barrel. Brent was last off more than 3 percent near $36.60 a barrel.
"With not much data driving the market, maybe some year-end cleaning up of portfolios. ... I'm not overly concerned. This (decline in stocks) is really oil," said Chris Gaffney, president, Everbank World Markets.
"I think demand's still going to be there. While we've got OPEC pumping as fast as they can, I feel like we're nearing a bottom but it's still tough to call it," he said. He expects higher oil prices next year.
WTI gained 9 percent last week, helping U.S. stocks post their best week of the month so far. However, WTI is on track for its second-straight monthly decline and its second consecutive annual loss since the years 1997 to 1998.
Natural gas rallied 9.8 percent to $2.228 per million British thermal units for its best daily performance since Oct. 27.
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Freeport-McMoRan closed down 9.5 percent to weigh on materials, the second-greatest decliner in the S&P 500 Monday. The firm announced that co-founder and long-time executive James Moffett will step down from the board and as Executive Chairman. The stock is down about 70 percent year-to-date.
The SPDR Barclays High Yield Bond ETF (JNK) and iShares iBoxx USD High Yield Corporate Bond ETF (HYG) both closed about half a percent lower.
In a light day of economic reports, the Texas Manufacturing Outlook Survey showed Texas factory activity increased for a third month in a row in December to 13.4. However, the the index of future general business activity turned negative in December.
Treasury yields traded mixed, with the 10-year yield mildly lower near 2.23 percent and the 2-year yield higher around 1.01 percent.
The Treasury Department auctioned $26 billion in 2-year notes at a high yield of 1.056 percent.
The U.S. dollar traded a touch lower against major world currencies, with the euro near $1.097 and the yen at 120.35 yen against the greenback in the close.
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European stocks ended lower amid the decline in oil. London's FTSE index was closed for a U.K. public holiday.
Asian equities closed mostly lower, with the Shanghai composite down about 2.5 percent for its worst day since Nov. 27. The Shanghai composite is still on pace for its first two-year win streak since 2007.
Over the weekend, China's National Bureau of Statistics said profits earned by Chinese industrial companies in November fell for the sixth-straight month, according to Reuters.
As of the close Monday, the S&P 500 was down 0.12 percent for the year so far, and the Dow was off 1.65 percent. The Nasdaq composite was up 6.44 percent year-to-date.
Read MoreWhy the week ahead is so pivotal for the stock market
The last trading week of the year is historically positive for stocks — the so-called Santa Claus rally.
Jeffrey A. Hirsch of the Stock Trader's Almanac said in a note that the seven-day trading day period between the open of Dec. 24 and the close of trade on Jan. 5 usually sees an average 1.5 percent return for the S&P 500.
"The failure of stocks to rally during this time tends to precede bear markets or times when stocks could be purchased at lower prices later in the year," he said.
The Dow Jones industrial average closed down 23.9 points, or 0.14 percent, at 17,528.27, with Chevron the greatest decliner and Walt Disney leading advancers.
The S&P 500 closed down 4.49 points, or 0.22 percent, at 2,056.50, with energy leading six sectors lower and consumer discretionary the greatest gainer.
The Nasdaq composite closed down 7.51 points, or 0.15 percent, at 5,040.99. Apple closed down about 1 percent, while the iShares Nasdaq Biotechnology ETF (IBB) fell nearly 0.8 percent.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, held near 17.
About two stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 614 million and a composite volume of nearly 2.5 billion in the close.
Trade volume across all exchanges was one of the lowest of the year.
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Gold futures settled down $7.60 at $1,068.30 an ounce.
On tap this week:
8:30 a.m.: International trade in goods
9:00 a.m. S&P/Case Shiller home prices
10:00 a.m. Consumer confidence
1:00 p.m. 5-year Treasury note auction
7:00 a.m.: Mortgage applications
10:00 a.m. Pending home sales
10:30 a.m.: Oil inventories
1:00 p.m. 7-year Treasury note auction
3:00 p.m.: Farm prices
8:30 a.m. Initial claims
9:45 a.m. Chicago PM
10:30 a.m.: Natural gas inventories
4:30 p.m.: Fed balance sheet
New Year's Day holiday
*Planner subject to change.
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