"Our stock market has had a very meaningful move to the upside, at a 20% annual rate, and is arguably overvalued, especially if you consider the rise in bond yields," said Hugh Johnson, chairman of Johnson Illington Advisors.
A surge in crude oil prices, which sent the price of a barrel over $66, also gave investors pause, he said.
The Dow Jones Industrial Average fell 3.7 points to 13,664, with 18 of its 30 components retreating, led by Procter & Gamble Co. , Merck and General Motors Corp. .
Bucking the trend among blue chips, Wal-Mart Stores Inc. rose 3.3%.
The stock was upgraded by JP Morgan, HSBC, Wachovia and Morgan Stanley following the retail giant's shareholder meeting, where it revealed plans to cut capital spending and return more cash to shareholders.
And General Electric Co. also rose 0.9% after a Barron's article outlined the case for breaking up the juggernaut multinational.
The S&P 500 index reversed early weakness to gain 1.4 points to 1,537, along with the Nasdaq Composite , which rose 0.7 points to 2,614.
Deal-making news, including Flextronics International Ltd.'s agreement to buy Solectron Corp. for $3.6 billion, provided some support for tech shares and the broad market.
Palm jumped 8.7% after agreeing to sell 25% of the firm to a private-equity firm for $325 million.
Trading volumes showed 1 billion shares exchanging hands on the New York Stock Exchange and 1.5 billion trading on the Nasdaq stock market. Advancing issues topped decliners by 17 to 14 on the NYSE, while decliners topped gainers by 16 to 13 on Nasdaq.
BlasC) about Shanghai?
The mild dip in U.S. trading signaled that investors aren't overly worried about yet another stumble in the Shanghai stock market. In spite of an 8% battering in Shanghai, other Asian markets recovered, including the Hang Seng in Hong Kong and the Nikkei in Tokyo.
A tumble in the Chinese stock market last week was followed by rally on Wall Street the next day. When Shanghai fell sharply in late February, the Dow industrials had plunged 416 points.
But since then, U.S. stocks have staged an impressive rally. Through May alone, the Dow gained 4.3%, the S&P advanced 3.2% and the Nasdaq gained 3.1%.
Bond yields rising
Last week, a slew of better-than-expected data, including the May employment report, boosted confidence in the economy and helped the Dow gain 1.2%, the S&P 1.4% and the Nasdaq 2.2%.
Yet, strong data also pressured bond prices, pushing their yields, which move inversely to price, much higher. The yield on the benchmark 10-year Treasury bond surpassed 5%, its highest level since mid-August.
On Monday, the 10-year bond rose 2/32 to 96 17/32, while its yield fell to 4.95% , amid safe-haven buying from the Shanghai sell off.
Should U.S. stocks finally halt their impressive rally this week, "it will either be that investors turn their attention to rocketing interest rates or it will have to come from Wednesday's economic release on productivity and unit labor costs," said Marc Pado, market strategist at Cantor Fitzgerald.
Bonds lost a bit of steam as Wall Street took Shanghai in stride.
There was limited reaction to news that factory orders rose 0.3% in April, below the 0.8% expected by economists surveyed by MarketWatch. Orders in March were revised up to 4.1% from 3.5% previously, putting the level of orders close to expectations.
The government also said that businesses boosted their capital spending in April at a faster pace than previously reported.
After the data, the dollar remained weaker against rivals.
Crude oil prices rose 51 centto $65.59 amid concerns that a tropical cyclone might enter the Persian Gulf on Wednesday.
Gold prices also rose as crude oil advanced and the dollar fell.
Deals to the rescue?
More deal-making developments helped provide some support for the market.
A meeting between the Bancroft family, which controls Dow Jones , and Rupert Murdoch, whose company News Corp. made a $5 billion bid for Dow Jones, is scheduled to take place on Monday.
Dominion agreed to sell some U.S. gas and oil operations to Loews for $4 billion and other operations to XTO Energy for $2.5 billion.
Avaya rose over 3% after The Wall Street Journal reported it is close to a deal to be bought by TPG Capital and Silver Lake Partners for $17 a share, the newspaper added, citing people familiar with the matter.
Health Care Properties agreed to buy U.S. biotech real estate from Britain's Segro for $2.9 billion. Qiagen agreed to buy Digene for $1.6 billion in cash and stock.
AXA agreed to sell a Dutch unit for $2.35 billion to SNS Reaal of Holland.
Subprime mortgage firm Accredited Home Lenders Holding Co. said it agreed to be acquired by Lone Star Fund V L.P. for about $400 million, or $15.10 a share, in an all-cash deal.
Investors in the pharmaceutical industry were paying close attention the American Society of Clinical Oncology meeting in Chicago.
Roche , the majority owner of Genentech , fell in Swiss trading on concerns about Avastin's colorectal cancer performance as well as that a lower-dose Avastin version showed improved survival in lung cancer. Bayer rose in Germany after it and Onyx reported improved survival from patients taking a liver cancer drug.
Onyx gained 7.5%.
Early-stage trials from Arqule and Exelixis showed "impressive" response rates, according to analysts at Rodman & Renshaw.
By Nick Godt