Stocks End Lower as Fed Optimism Fizzles

Stocks finished lower in thin trading Thursday following a disappointing new home sales report and as earlier enthusiasm faded over the Fed's decision to hold interest rates near zero until at least 2014.

The Dow Jones Industrial Average slipped 22.33 points, or 0.18 percent, to close at 12,734.63, led by AT&T and H-P .

The S&P 500 fell 7.60 points, or 0.57 percent, to finish at 1,318.45. The Nasdaq declined 13.03 points, or 0.46 percent, to end at 2,805.28.

Despite the day's losses, all three major averages are on pace for their fourth straight week of gains, for the first time since December 2010.

The CBOE Volatility Index, widely considered the best gauge of fear in the market, ended above 18.

Most S&P sectors closed in negative territory, led by telecoms and energy.

In addition to keeping rates near zero, the Fed also took the unusual and historic step of setting an inflation target of 2 percent, when it released its economic forecast and said it will maintain its highly accommodative stance to support the recovery.

“This seems to be more of a technical pullback and doesn’t seem to be necessarily caused by one particular thing,” said Marc Pado, U.S. market strategist and technical analyst at Cantor Fitzgerald. “The groups that are doing poorly today were groups that have been on top of the list in the first three weeks of January…so it’s people taking some profits.”

In fact, some strategists expect the market to shoot higher following the brief consolidation.

“I think we’re going to see the S&P move up to the 1,350-1,370 level this year, probably sometime this quarter…we’re probably going to see some good momentum because valuations still look relatively attractive,” said Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research. “We’re only four months into this new bull market…and looking to history as a guide, we find that 3, 6, and 12 months after we see something like that, the market has been up 13.5, 23, and 32 percent with the cyclical sectors leading through 6 and 12 months.”

Elsewhere, political and business leaders continued to meet at the World Economic Forum in Davos with the euro zone debt crisis still dominating discussions. Greece’s private bondholders were also set to meetto decide what action to take after their proposal to accept a 50 percent hair cut on the Greek sovereign debt they hold was rejected as insufficient by European leaders earlier in the week.

Meanwhile, Apple pulled back slightly a day after the iPhone maker's stock hit all-time highs, boosted by quarterly results blew past estimates. Apple even briefly topped ExxonMobil as the world's biggest companyby market cap in the previous session.

Among another flurry of earnings, Caterpillar rallied after the heavy equipment maker posted a 58 percent jump in quarterly profit that blew past expectations, helped by an increased global demand for construction machinery.

3M also gained after the multinational conglomerate reported higher-than-expected earnings. Meanwhile, fellow Dow component AT&T posted earnings that narrowly missed expectations, but the wireless provider still beat revenue estimates, thanks to a surge in new subscribers.

Netflix skyrocketed more than 20 percent after the movie-streaming website said it picked up more U.S. subscribersthan expected in the fourth quarter. The stock has surged almost 70 percent year-to-date, making it the top gainer on the S&P 500.

On the M&A front, Amgen said it plans to purchase biopharmaceutical firm Micromet for $11 a share, in a deal valued at about $1.16 billion.

On the economic front, weekly jobless claims gained 21,000 last week to a seasonally adjusted 377,000, according to the Labor Department. Still, despite the increase, the figure still held below the 400,000 mark and the underlying trend continued to point to improving employment conditions.

Meanwhile, new home sales posted a surprising dropin December for the first time in four months to a seasonally adjusted 307,000.

Durable goods orders increased for the second straight month in December, according to the Commerce Department. And leading indicators increased to a five-month high in December, according to the Conference Board, pointing to continued momentum in the recovery.

“We see warning signs, slowing GDP and an anemic recovery in employment [from yesterday’s Fed statement],” said Todd Schoenberger, managing director at LandColt Trading. “Earnings haven’t been great and nothing’s really been significant so there’s been no real catalyst that’s going to propel the bulls further.”

Treasurys pared their gains after the government auctioned $29 billion in seven-year notes at a high yield of 1.359 percent, and a bid-to-cover of 2.73.

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Coming Up This Week:

FRIDAY: GDP, consumer sentiment; Earnings from Chevron, P&G, DRHorton

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