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Stocks Fall Ahead of Jobs Report

Stocks ended modestly lower after an unexpected rise in initial jobless claims and disappointing July retail sales, as the market awaited the critical July employment report.

The Dow Jones Industrial Average closed down 5.5 points, or 0.5 percent, to 10,674.98, after eking out a modest gain in the previous session. Still, the market remains 15.33 higher from a year ago.

The S&P 500 fell 1.43 points, or 0.13 percent to 1125.81, while theNasdaqslipped 10.51 points, or 0.46 percent, to 2293.06. The CBOE volatility index, widely considered the best gauge of fear in the market, rose above 22.

American Express and Bank of Americawere among the biggest drags on the Dow, while Caterpillar was among the handful of gainers.

Technology, financials and consumer staples were lower, while the telecom and consumer discretionary sectors were the leaders.

In the day's economic news: First-time claims for unemployment benefits rose by 19,000 last week to 479,000, the highest since early April. Economists had expected claims to drop by 2,000.

The jobless-claims data comes ahead of the government's July jobs report, due out on Friday. Analysts expect to see that nonfarm payrolls shed 65,000 jobs, mostly due to a dropoff in government workers, according to the latest survey from Reuters. The private sector is expected to have added 90,000 jobs.

Despite today's disappointing jobless claims numbers, some strategists were hopeful ahead of Friday's jobs report.

"We make the mistake of thinking that the weekly jobless numbers are going to correlate tightly to the monthly changes in nonfarm payroll numbers and that's a big mistake," said Art Hogan, director of global equity product at Jefferies. "I think there's a possibility that we see an in-line number to an upside surprise in terms of numbers of jobs created...especially after the positive ADP number we got earlier in the week."

An independent report from ADP Employment Services earlier this week said the private sector added 43,000 jobs in July.

Retail sales were sluggishin July, with many chains falling short of expectations and others reporting that modest improvements in sales from last summer's anemic levels were largely due to discounts and sales promotions. With many teens still unemployed, teen chains like The Buckle and Hot Topic took a hit.

But investors were still betting on consumer discretionary, which was among the day's best-performing sectors. Shares of Macy's , Kohl's, Gap and Target were all higher. But JCPenney and Aeropostale fell.

With more consumers holding back and personal savings rates inching up, some strategists believe the money will eventually flow into the retail sector as people start opening up their wallets throughout the year.

"There are some opportunities in the sector if you do your homework," said Brian Sozzi, research analyst at Wall Street Strategies. "But I think you have to play to the downside as well because you're going to see some surprises across the board."

Financial stocks were mostly lower, including Goldman Sachs following news that it may spin off part of its proprietary trading operationsinto an independent hedge fund as soon as Friday.

Rivals Bank of America , Citigroup and JPMorgan also fell.

Two more encouraging reports came out of the media sector — News Corp and Viacom. The results, along with earlier reports from Time Warner and CBS, showed an improvement in ad revenue. The Benchmark Company raised its price target on Time Warner to $40 from $37.

Cigna jumped over 5 percent after the health insurer saw its profit drop 32 percent, but raised its full-year outlook.

Kraft Foodsposted better-than-expected earningsThursday after the bell, although sales fell short. Also Activision Blizzard reported a slightly better-than-expected profit, although sales disappointed. The video game maker reaffirmed its outlook for the year.Activision Blizzard is expected to report earnings shortly

AIG will report before the bell Friday morning, while Warren Buffett's Berkshire Hathaway is scheduled to report Friday afternoon.

Meanwhile, BP shares rose after the company started pumping cement into its blown-out well in the Gulf of Mexico as it advanced with moves to permanently kill the source of the oil spill.

On Tuesday, scientists estimated that almost three-fourths of the oil from the spill is gonefrom the Gulf of Mexico through skimming, burning and evaporation, but residents expressed skepticism toward the reports.

Oil fell for a second day, approaching $82 a barrel, as dollar strength kept a lid on prices.

In deal news, Verizon and Google agreed to a deal over how Internet traffic will be treated, according to two people familiar with the agreement.

And IBM and Aetna on Thursday jointly launched a service aimed at helping hospitals improve patient care by making better use of electronic medical records and other digital data.

Volume on the New York Stock Exchange was light Friday, with 875 million shares changing hands. Advancers led decliners, roughly 8 to 6.

Still to Come:

FRIDAY: Fed hearing on new bank regulations; July jobs report; consumer credit; Earnings from Berkshire Hathaway, AIG

— Abby Schultz contributed to this story.

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