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Wall Street slips as it puts September rally on "pause"

NEW YORK (Reuters) - Wall Street took a breather from a month-long rally on Wednesday, with investors bracing for higher volatility going forward as the best quarter in a year nears its end.

The S&P 500 is up 9.1 percent in September, traditionally a weak month for stocks, as investors anticipate the Federal Reserve will take extra steps to spur economic activity.

Still, the VIX futures show the options market has a very high level of skepticism about this rally.

“There is still an elevated bid as traders position themselves for a higher expectation of volatility,” said Steve Place, a founder of InvestingWithOptions.com.

The CBOE Volatility index .VIX or VIX, Wall Street's favorite gauge of investors' anxiety, rose 2.9 percent to 23.25 while VIX futures were showing levels from 24 to 28 until the year end and above 30 for next year.

In the absence of economic data, there were few catalysts to motivate investors to continue the recent gains, particularly as earnings season looms.

“The market is at a stage where it’s trying to find out the right level. It seems like investors don’t have a clear plan or strategy right now because September turned out so well,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Traders work on the floor of the New York Stock Exchange September 22, 2010. REUTERS/Brendan McDermid

The Dow Jones industrial average .DJI shed 22.86 points, or 0.21 percent, to 10,835.28. The Standard & Poor's 500 Index .SPX dipped 2.97 points, or 0.26 percent, to 1,144.73. The Nasdaq Composite Index .IXIC fell 3.03 points, or 0.13 percent, to 2,376.56.

Aside from volatility, participants were anticipating new money coming into the market as the quarter comes to an end, which could extend the impressive September rally.

“There are investors who are just starting to chase this month’s performance,” keeping the market from a significant pullback, said Steve Goldman, market strategist at Weeden & Co in Greenwich, Connecticut.

The S&P 500’s relative momentum index, which moves with the relation of upward and downward changes in the benchmark, rose last Friday above 70, a level that indicates an overbought condition. It currently stands at 72.2.

The S&P 500 is on track to close the quarter up 11.1 percent after falling 11.9 percent in the second quarter. If the S&P ends September up more than 9 percent, it would be the fourth month it has done so since 1990.

Hewlett-Packard Co HPQ.N, a Dow component, rose 2.2 percent to $42.53 after the computer and printer maker forecast 2011 profits above estimates.

Family Dollar Stores Inc FDO.N gained 1.6 percent to $44.05 after the discount retailer recorded a quarterly profit that beat analysts' estimates and issued a bullish outlook.

On the downside, Green Mountain Coffee Roasters Inc GMCR.O slid 16.1 percent to $31.06 after disclosing a regulatory inquiry into its accounting practices.

Property and casualty insurer Liberty Mutual Agency Corp, set to be the largest initial public offering in the United States so far this year, postponed its $1.22 billion IPO, citing a stalled economic recovery, a volatile stock market and undervalued property and casualty insurance stock prices.

Continuing a recent trend, volume was light. Only 7.4 billion shares traded on the NYSE, Amex and Nasdaq, compared with the previous year’s daily average of 9.65 billion shares.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 17 to 13. On the Nasdaq, about seven stocks rose for every six that fell.

Reporting by Angela Moon; Additional reporting by Rodrigo Campos, Doris Frankel and Clare Baldwin; Editing by Jan Paschal

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