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The Nasdaq composite index .IXIC dropped 1.4 percent and closed just above its 50-day moving average, a widely followed technical level that if breached could signal more declines in the sector that has helped lead the market rally.

Wells Fargo downgraded the semiconductor sector, noting its strong upward moves. The PHLX semiconductor index .SOX has risen 130 percent since March 2009. The index also is up 45 percent since the start of September, while the broad S&P 500 has advanced about 25 percent in that period.

Also weighing on Nasdaq, communications equipment maker Ciena Corp (CIEN.O) forecast weaker-than-expected sales, sending its shares sliding 9.2 percent to $25.98.

Investors "are jumping on an opportune seasonal slowdown that typically happens between March and July for tech," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San Francisco. "It has been one of the leadership groups since August."

Brent crude has been on investors' radar as analysts and economists gauge how it might hurt economic demand if prices continue to rise. Crude edged lower on Monday after hitting its highest since September 2008 on conflict in the Middle East. Brent crude dipped 0.8 percent to $115.20 a barrel.

The Dow Jones industrial average .DJI dropped 79.85 points, or 0.66 percent, to 12,090.03. The Standard & Poor's 500 Index .SPX fell 11.02 points, or 0.83 percent, to 1,310.13. The Nasdaq Composite Index .IXIC lost 39.04 points, or 1.40 percent, to 2,745.63.

Wells Fargo said downgrading the semiconductor sector to "market weight" from "overweight" was "an indication of a moderate though still optimistic view."

Even though gains in semis have outpaced the broader market, the S&P 500 and the semiconductor index have been moving in the same direction, which could mean further declines in the sector and spell more of the same for the overall market.

A 20-day correlation between the S&P 500 and the semiconductor index .SOX was at 0.92, with a reading of 1 suggesting a perfect correlation.

Tech has been a favorite of analysts, along with other cyclical sectors.

The CBOE volatility index .VIX rose 8.2 percent to 20.63. Joe Kinahan, chief derivatives strategist at TD Ameritrade in Chicago said investors were insuring against a possible fall below 1,300 for the S&P 500.

"If we break this level the S&P could continue all the way down to 1,275. So many investors are trying to get ahead of this by paying up for portfolio protection in the form of index and equity options," he said.

Worries about the effects of recent higher oil prices on the economy have been a negative for stocks, but analysts recommend buying the energy sector.

"Industrials are ultimately affected by energy prices, so a sector that works as a hedge would be the energy sector," said Bryant Evans, investment adviser and portfolio manager at Cozad Asset Management in Champaign, Illinois.