Stocks bounced off the lows of the session, but ended lower, as disappointing economic news halted the market's rally and as Merck dragged down the Dow amid problems with a key blood-clotting drug.
The Dow Jones Industrial Average fell 23.54 points, or 0.2 percent, to close at 11,731.90 after hitting a two-year high in the previous session.
Merck, Alcoa and Bank of America led blue-chips lower, while Home Depot and Verizon rose.
The S&P 500 fell 2.20 points, or 0.2 percent, to close at 1,283.76, while the tech-heavy Nasdaq fell 2.04 points, or 0.07 percent, to close at 2,735.29. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 16.
Among key S&P sectors, materials, health care and financials fell, while consumer staples rose.
The dollar skidded against a basket of currenciesafter the jump in jobless claims was reported and as the euro gained, boosted, too, by a successful auction of Spanish bonds. Gold prices rose to $1,386.90 an ounce.
Federal Reserve Chairman Ben Bernanke gave an upbeat outlook for the economy, saying it should grow 3-4 percent in 2011. Bernanke's comments were made during a Small Business Forum in Washington D.C., co-sponsored by the Federal Deposit Insurance Corp. and CNBC.
But Bernanke added that the strengthening economy won't alleviate unemployment "at the pace we'd like it to."
Despite's Thursday lackluster performance, Brian Battle, vice president of trading at the Performance Trust Capital Partners, told CNBC.com, that "the momentum is for the market to go higher."
Battle's concern, however, is that the "slow melt up" in the markets will force "shorts," referring to investors who bet stocks will fall, to exit the market. "If we do get a correction, there’s nobody left to buy," Battle said, adding he isn't sure the economy is good enough to justify current levels.
Investors also were concerned over rising food and energy-related commodity prices. However, David Kelly, chief market strategist at JPMorgan Funds, said this is a good chance for investors to make some money.
“Rising global growth [will] push up food and energy prices…but I have a generally positive outlook in terms of commodities as an investment area,” Kelly told CNBC.
On the consumer front, however, Kelly said he is concerned rising prices were not necessarily translating into higher wages.
“The latest wage reading year-over-year is the lowest since 2004,” he said. “If you don’t get that wage increase, you won’t get a general inflation problem in the U.S.”
On the health care front, Merck sank after the pharmaceutical company ran into problems in clinical trials with a drug designed to prevent blood clots.
Eli Lilly also declined after the FDA panel rejected a pancreatic-enzyme replacement drug, called liprotamase, developed by the pharmaceutical company, saying there wasn't enough evidence the drug was effective. Chubb also slipped after Deutche Bank cut the health insurer to "hold" from "buy."
But UnitedHealth rose after Wedbush raised the health care company to "outperform" from "neutral."
Shares of Marathon Oil surged to the top of the S&P 500 after the energy firm announced it would shed its refinery and pipeline operations into a separate company.
ITT made a similar announcement just yesterday, announcing it would split into three companies focused on water, military information technology, and industrial positions. After rising Wednesday, ITT shares fell after Cowen cut its rating on the stock to "neutral" from "outperform," and SunTrust Robinson Humphrey cuts its rating to "neutral" from "buy." Deutsche Bank, however, raised its price target for ITT to $65 a share from $58.
Elsewhere among energy stocks, Citi named the exploration and production sector among its top picks for 2011, specifically citing independent energy producers Anadarko Petroleum , Apache and Talisman Energy .
Citi also upgraded Nexen , an independent Canadian energy company, to "buy" from "hold," and downgraded Newfield Exploration to "hold" from "buy" and Range Resources to "sell" from "hold."
The price of oil slipped to about $91.30 a barrel, with losses limited by the fall in the dollar.
General Electric advanced after news its energy division was acquiring data center companyLineage Power Holdings for about $520 million. GE is CNBC's parent company.
Banks took a breather following a strong rally in the previous session after brokerages issued upbeat outlooks for the sector.
Bank of America fell after Citi removed the bank from its "top picks live," list, which is intended for "short-term catalyst driven stocks." The brokerage maintained its "buy" rating on the bank, but said the near-term performance for the stock could be affected by mortgage repurchases and the fact earnings-per-share estimates for 2011 by the Street of $1.47 a share are too high. Citi has an EPS target of $1.15.
Citigroup declined despite Raymond James raising its price target on the bank to $6.50 from $5.50.
Meanwhile, rival JPMorgan was slated to report earnings on Friday morning—the first major bank to do so this quarter.
On the tech front, Google traded flat after news the U.S. Justice Department may launch an antitrust challenge to the search engine giant's $700 million purchase of ITA Software, the airline ticketing software company, according to sources, Reuters said. Travel websites Orbitz Worldwide and Expedia rose after the news, as the sites have been concerned Google's purchase would mean they couldn't get access to ITA's software.
SAP surged more than 6 percent after the firm reported a 27 percent increase in software and software-related service revenue as the recovery in demand for business software continued.
Meanwhile rival Micron jumped after Roberts W. Baird raised its rating on the memory chipmaker to "outperform" from "buy," and Sterne Agee & Leach raised its rating to "buy" from "neutral." Also, Wedbush raised its price target for the company to $15 a share from $11.
Dow component Intel was scheduled to post earnings after the bell. Analysts expect the company to report earnings of 53 cents a share, on revenue of $11.4 billion.
TTM Technologies surged after the printed circuit board maker raised its quarterly forecast, saying an increase in demand for its high technology products boosted its prospects. Meanwhile, Infosys sank after the Indian tech firm posted a disappointing report, reflecting the growing strength of the Indian rupee.
Apple rose slightly after UBS raised its price target on the iPhone and iPad maker to $415 a share from $365.
Sara Lee advanced after news Kohlberg Kravis Roberts may possibly partner with another party to bid for the food group, according to Reuters, citing two sources familiar with the situation. Among other food companies, Chipotle gained after Miller Tabak upgraded the restaurant chain to to "buy" from "hold."
Shares of Whole Foods jumped after Jefferies raised its price target to $60 from $47 on the upscale grocer.
Deere got a boost after JPMorgan raised its rating on the heavy equipment maker to "overweight" from "neutral." In addition, Eli Lustgarten of Longbow Research told CNBC that he still sees more room to runin Deere's stock.
And AT&T traded flat after the telecom company announced that it expects to take a pre-tax charge of $2.7 billionin the fourth quarter to reflect an accounting change related to pensions and other retirement benefits.
JDS Uniphase , meanwhile, soared past its 52-week high after Stifel Nicolaus raised the telecom service provider's price target to $21 a share from $19.
Volume on the consolidated tape of the New York Stock Exchange was 4.2 billion shares, while 931 million shares changed hands on the NYSE.
Meanwhile Treasury prices pared gainsafter the government auctioned $13 billion of 30-year bonds with a yield of 4.515 percent and a bid-to-cover ratio of 2.67. The 10-year note gained after the auction, as the yield fell to 3.31 percent.
In economic news, jobless claims jumped to their highest level since Octoberwhile food and energy costs boosted producer prices. A surge in exports to their highest level in two years helped narrow the trade deficit, however.
Meanwhile, the American Association of Individual Investor's weekly poll of investor sentiment showed bullish sentiment fell to 52.3 percent this week, although optimism that stock prices will continue to rise was above the historical average of 39 percent for the 19th straight week, the AAII said.
The eight-week average for bullish sentiment, however, is 53 percent, the highest level since Jan. 6, 2005, the group said.
European shares closed down from the previous session's 28-month highsas investors became concerned about inflation.
On Tap This Week:
THURSDAY: After-the-bell earnings from Intel.
FRIDAY: CPI, retail sales, industrial production, consumer sentiment, business inventories, Richmond Fed president speaks; before-the-bell earnings from JPMorgan.
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