* Wal-Mart offers $4 billion for South Africa's Massmart
* VIX futures may be overbought, signal warning: analyst
* Dow off 0.4 pct, S&P down 0.6 pct, Nasdaq off 0.5 pct (Updates to close)
By Angela Moon
NEW YORK, Sept 27 (Reuters) - U.S. stocks slipped on Monday as investors took a break from a four-week rally, but they remained optimistic the advance would resume as a flurry of deals suggested companies were seeing value in the market.
Defying September's track record as the worst month for stocks, Wall Street was on track for one of its best months in a decade. In order for the rally to continue, market sentiment hinges on a recent trend of declining volatility.
"Today's pause was much needed after such a strong rally. If we get decent news from here, we could be looking at going beyond April highs of 1,217 to 1,219 on the S&P," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
Several business deal announcements lifted sentiment.
Consumer goods group Unilever Plc plans to buy U.S. hair care group Alberto Culver Co for $3.7 billion. Alberto Culver surged 19.6 percent to $37.64, while Unilever's New York-traded stock added 1.1 percent to $28.86.
"We are starting to see firms actually putting their money to use instead of just being on the sidelines," Massocca said.
The Dow Jones industrial average was down 48.22 points, or 0.44 percent, at 10,812.04. The Standard & Poor's 500 Index was down 6.51 points, or 0.57 percent, at 1,142.16. The Nasdaq Composite Index was down 11.45 points, or 0.48 percent, at 2,369.77.
Continuing a recent trend, volume was very light, with only 6.54 billion shares traded on the NYSE, Amex and Nasdaq, far under the previous year's daily average of 9.65 billion shares.
The S&P 500 is up 8.9 percent from a month ago as investors welcomed recent data that suggested the economy would avoid a double-dip recession. The benchmark has posted monthly gains of more than 9 percent only twice since the start of 1992.
But options investors seemed to be more concerned about current market conditions.
Larry McMillan, president of McMillan Analysis Corp, said the most extreme overbought conditions were seen in the "term structure" of VIX futures. The CBOE Volatility Index is Wall Street's most popular gauge of investor anxiety.
"There are very large premiums on the VIX futures, and their prices are aligned such that there is a steep upward slope from one month to the next. That is, the 'term structure' is very steep," he said on a website.
"While that reflects an ongoing bullish market, it is also an overbought condition. The last three times that the term structure approached levels this steep, sharp market corrections followed with the S&P dropping from 50 to 200 points."
The VIX was up 3.8 percent at 22.54.
He added that if the VIX falls below 21, along with the S&P staying above 1,130, it would be a positive confirmation. However, if the VIX doesn't follow through, it would be another warning indicator.
The VIX index usually has an inverse relationship with the Standard & Poor's 500 benchmark as it tracks option prices that investors are willing to pay as a protection against risk in the underlying stocks.
Wal-Mart Stores Inc, the world's largest retailer, offered to buy Massmart, South Africa's third-largest retailer by value, for more than $4 billion as it seeks to expand on the continent. Wal-Mart, a Dow component, slipped 1.1 percent to $53.48.]
AirTran Holdings Inc jumped 61.3 percent to $7.34 after Southwest Airlines Co offered to buy the regional carrier for $7.69 per share. Southwest shot up 8.7 percent to $13.35. The Arca airline index rose 1.8 percent to close at 42.75, after earlier hitting a fresh 52-week high at 43.36.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 17 to 13. On the Nasdaq, about eight stocks fell for every five that rose. (Reporting by Angela Moon; Editing by Jan Paschal)