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Rally Loses Steam

The averages end mixed after hitting new highs for the year earlier in the day.

Updated from 4:05 p.m. EDT

Stocks trimmed big gains Monday to end mixed, as early enthusiasm about the economy waned once stocks breached some important resistance levels.


Dow Jones Industrial Average

closed up 47 points, or 0.5%, at 8997. The Dow had been up as much as 153 points earlier, moving beyond 9,000 for the first time since Dec. 2. The


, which had been up 26 points earlier, finished down 5 points, or 0.3%, at 1591. The

S&P 500

ended up 3 points, or 0.3%, at 967. Although the S&P eclipsed its Aug. 22 high of 965, it ended well below its session high of 978.

"Shortly around 3 p.m., a story hit that four U.S. soldiers were detained by Iranian authorities, so we think that spooked some people," said James Park, senior vice president at Brean Murray & Co. "Also, the

Dow was trading right around 9,000 at that point and the S&P was at 975."

Rumors that SEC Chairman William Donaldson had called the market "overvalued" also were cited as a reason for the late-afternoon selloff, but the press department at the SEC said Donaldson hadn't made any public comments Monday.

Daniel Morgan, a fund manager at Noble Financial Group in Florida, said he believes that stocks could be getting "exhausted" after running up so much in such a short period of time. The Nasdaq has climbed 28% since March 12, while the Dow and S&P 500 are up about 20%.

Stocks recorded strong gains earlier and all three major averages were sitting at fresh highs for the year, as investors cheered a report from the Institute for Supply Management. The ISM said its manufacturing index came in at 49.4 in May, compared with 45.4 in April. While still below the key 50 mark -- a level that indicates growth -- the May reading was better than economists' expectations for a reading of 48.5.

"Supply managers' comments seem to be split among those who are starting to see improvement, those who see no improvement in sight and those who are uncertain as to the direction," said ISM Chairman Norbert J. Ore. "This is not really unusual when the economy is at a crossroads. Judging by the reversal in a number of the indexes this month, we are apparently at or near a crossroads."

New orders rose to 51.9 last month compared with 45.2 in April, while prices paid fell to 51.5 from 63.5 in April. Investors shrugged off some less optimistic news on construction spending, which fell 0.3% in April after a 1% drop in March. Economists had expected a positive reading of 0.2%.

The bull/bear debate continued Monday, with Merrill Lynch chief strategist Richard Bernstein opining that the equity bubble is "reflating," with money flowing into areas that need it least, namely the tech sector. Meanwhile, Salomon Smith Barney strategist Tobias Levkovich said the recent advance has been justified, given improvements in the economy.

In the bond market, Treasuries retreated, with the yield on the 10-year climbing to 3.42%. Although stock and bond prices have moved in opposite directions for the past week or so, both are higher for the year. Merrill economist David Rosenberg said bond investors are happy because they realize the Federal Reserve could be "years away" from tightening interest rates, and equity investors are cheering because there is so much liquidity in the financial system and because dividend yields look attractive relative to cash yields.

"We now have a situation where the 3-month T-bill yield is south of 1.1% and the S&P 500 dividend yield is 1.7%--a 60 basis point gap in favor of equities that we last saw in November 1962," he said.

Among sectors moving higher Monday were banks, software and utilities. Biotechs also advanced after drugmakers



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said their colon cancer treatments Avastin and Eribitux, respectively, were effective on patients. Genentech shares were up $4.12, or 6.5%, at $66.73, while ImClone was up $4.71, or 16.7%, to $33.50. Both were among the companies that presented data at the American Society of Clinical Oncology meeting over the weekend. (For more on the sector,

click here.)

Shares of software maker

J.D. Edwards


were up 82 cents, or 7%, at $12.59 after rival



said it would buy the company for about $1.7 billion in an all-stock deal. PeopleSoft shares were down $1.31, or 8%, at $14.97.

In other news, The Federal Communications Commission will relax rules governing ownership in the broadcast and newspaper industries, according to news reports.


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, the world's largest cell-phone maker, said it signed a marketing agreement with

AOL Time Warner's


Warner Music International to offer music on its 3300 mobile phone. Nokia was up 3 cents, or 0.2%, at $18.07, and AOL was up 22 cents, or 1.5%, at $15.44.

Crude oil futures were up to $30.64 a barrel in New York. The dollar moved higher against the euro after President Bush signaled that the currency's decline had gone too far. But it continued to lose ground against the yen.

European markets advanced, with London's FTSE 100 up 2% at 4129 and Germany's Xetra DAX up 2.7% at 3064. In Asia, Japan's Nikkei closed 1.5% higher at 8547, while Hong Kong's Hang Seng gained 1.6% to 9637.

On Friday the Dow ended 139 points higher at 8850. The S&P 500 added 14 points to 963, while the Nasdaq rose 21 points to 1596.