NEW YORK (Reuters) - Stocks sold off in late trading to close sharply lower on Friday, with the S&P 500 posting consecutive weekly losses for the first time since November, as investors retreated after a seven-month run of gains.
Traders attributed some of the selling to global index rebalancing and reallocation of investments to bonds from stocks, but a desire to protect profits also contributed to the exodus late in the session.
"As you sensed the weakening market with drifting lower underlying bids, I think sellers started to get a little nervous, and you started to see different areas of the market coming a little more unglued," said Michael James, managing director of equity trading at Wedbush Securities, in Los Angeles.
The S&P 500 ended May up 2.1 percent, its seventh straight month of gains and its longest streak of monthly gains since 2009.
The benchmark S&P 500 index is up 14.3 percent in 2013 after repeatedly scaling record highs, scoring its best five-month start to the year since 1997. Over the past seven months, the S&P 500 has climbed 15.5 percent.
The Dow Jones industrial average .DJI slid 208.96 points, or 1.36 percent, to close at 15,115.57. The Standard & Poor's 500 Index .SPX lost 23.67 points, or 1.43 percent, to finish at 1,630.74. The Nasdaq Composite Index .IXIC fell 35.38 points, or 1.01 percent, to end at 3,455.91.
For the week, the Dow fell 1.2 percent, the S&P 500 lost 1.1 percent and the Nasdaq dipped 0.1 percent.
For the month of May, the Dow rose 1.9 percent and the Nasdaq gained 3.8 percent.
Trading has been volatile for most of the week on concerns that the U.S. Federal Reserve may ease its monetary policy, the main engine behind the strong rally in equities this year.
Data on Friday gave mixed signals on the U.S. economy and failed to quell speculation about possible actions by the Fed to trim its stimulus measures. Manufacturing rose more than expected in May and reflected expansion of business activity after contraction in April.
But consumer spending fell in April for the first time in almost a year and inflation pressures were subdued.
"The economic data we have seen over the last week or so has been quite positive. It's the positive nature of that data, though it supports the market, it also speaks to the fact that tapering or a shift in monetary policy is more likely - the more positive it is," said Peter Kenny, chief market strategist at Knight Capital in Jersey City, New Jersey.
"As a result, people are more than happy to ring the register - you never go broke ringing the register on a winning trade."
Selling accelerated near the market's close with the rebalancing of the MSCI indexes at the end of the day. Credit Suisse forecast $19 billion in total trading as a result of the rebalancing, with $15 billion related to developed markets.
According to Credit Suisse, U.S. stocks were expected to see the greatest amount of net selling at the close as a result of the MSCI rebalancing, with a net outflow of about $300 million from indexes.
"What's happened in the last hour here, there's some index and month-end rebalancing that accelerated the downturn," said Bucky Hellwig, senior vice president of BB&T Wealth Management in Birmingham, Alabama.
Hellwig also said the weakness in the bond market in May could have prompted some fund managers to reallocate from stocks to bonds. U.S. Treasuries suffered their worst month since December 2010.
Energy and healthcare stocks were among the session's worst performers, with Pfizer Inc (PFE.N) and Exxon Mobil Corp (XOM.N) the two biggest drags on the S&P 500. Pfizer lost 3.6 percent to $27.23, while the S&P healthcare sector index .SPXHC dropped 2.2 percent. Exxon Mobil slid 1.8 percent to $90.47. The S&P energy sector index .SPNY lost 2 percent.
The Thomson Reuters/University of Michigan final reading on consumer sentiment for May was 84.5 - the highest level since July 2007 - and above expectations for a reading of 83.7.
Volume was heavy due to the MSCI rebalancing, with about 7.64 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, well above the daily average of 6.37 billion.
Declining stocks outnumbered advancing ones on the NYSE by 2,572 to 459. On the Nasdaq, decliners beat advancers by 1,787 to 693.
Additional reporting by Leah Schnurr and Herb Lash; Editing by Jan Paschal