Weak Economic Data Puts Stock Market Rally on Hold (ext: ABCNews/TheStreet)

The closer investors get to the government's July employment report, the more cautious they become.

Stocks slipped Wednesday as investors shied from making big moves ahead of the government's monthly reading on job losses and the unemployment rate, which comes out before the start of trading on Friday. The pullback, which took the Dow Jones industrials down 39 points, followed a 34-point gain Tuesday that was a slowdown from the previous day's triple-digit advance.
The big concern on Wall Street is layoffs, and whether companies trying to preserve their profits during the recession are continuing to slash jobs at a furious pace. Job cuts have to slow for the economy to have a solid recovery.
The caution in Wednesday's trading followed a disappointing report on the service industry. The Institute for Supply Management said its service index, a measure of the health of retail, financial services, transportation and health care companies, fell to 46.4 in July from 47 in June. It was the 10th straight monthly slide.
Still, there are plenty of signs of strength on Wall Street, and one is the fact that Wednesday's very modest loss was the biggest point drop in the Dow since July 7. Investors have been looking for the market to pause after it started to shoot higher in mid-July. But stocks' occasional dips have been mild because some investors who missed the rally are looking to buy when prices dip.

The Dow fell 39.22, or 0.4 percent, to 9,280.97. The broader Standard & Poor's 500 index fell 2.93, or 0.3 percent, to 1,002.72, while the Nasdaq composite index fell 18.26, or 0.9 percent, to 1,993.05.

The pullback in stocks on Wednesday is a sign of the market's health, analysts said, as building on to gains in an orderly, step-like fashion is more stable than a surge without any breaks. And dips in the market present opportunities for new buyers to step in.

Analysts said the jobs report on Friday is a critical juncture for the market and could set the tone for how stocks trade in the next few weeks.

"The question is, even if it is a little bit strong, will it be enough to support an additional near-term advance in the markets given the run the equities have had over the past several sessions?" Sheldon asked.

Economists expect the report will show the jobless rate rose to 9.6 percent as employers cut 320,000 jobs last month, better than the 467,000 lost in June.