Just as the market opened, Federal Reserve Chairman Ben Bernanke issued a stern speech on the subprime mortgage market and its impact on housing. However, he said the Fed didn't expect those problems to "significantly" affect the broader economy.
"We're not falling very much and we continue to move higher [overall]," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "We've come a long way from concerns over a recession to perhaps the ultimate goldilocks scenario."
Still, the Dow Jones Industrial Average finished down 10 points at 13,476, as 18 of its 30 components retreated. The Dow bounced off a morning low of 13,447.
Leading the gains were shares of Boeing Co. and United Technologies , while Coca Cola Co. and Verizon Communications fell.
Caterpillar Inc. was the worst performer among blue chips, losing 1.5% after Stifel Nicolaus downgraded the stock from a buy to a hold, citing "storm clouds for consumer spending that pressure economy-sensitive stocks."
Hewlett-Packard lost 0.8%. The computer maker reported lower fiscal second-quarter profit, but boosted sales by 13% and raised its full-year forecast.
Credit Suisse reiterated an outperform rating on the company. "We believe investors are not adequately rewarding HP for its superior growth and earnings profile, as such we would be buyers of the stock at this level," it said.
The Dow rallied to close at a new high Wednesday, leading investors to consolidate their gains on Thursday. Yet, periods of consolidation have been short-lived in a market rally that has continued with little interruption since mid-March.
"The bulls are clearly in control and standing in front of this freight train has caused shorts to race to cover at every new high," said Marc Pado, market strategist at Cantor Fitzgerald in a note.
Retailer JC Penney Co. Inc. , whose earnings topped forecasts and which raised its outlook for the year, gained 5.3%.
Oil races past $64 a barrel
Oil futures rallied $2.31, or 3.4%, to close at $64.86 a barrel amid expectations of strong gasoline demand ahead of the summer driving season.
While a sustained move higher might revive concerns about the impact of higher gasoline on consumption, the move helped lift energy shares such as Dow-component Exxon Mobil Corp. on Thursday.
The S&P 500 still finished down 1.4 points at 1,512, while the Nasdaq Composite slipped 8.0 points to 2,539.
Micron Technology weighed on tech shares, losing 5.3% after filing to sell $1.1 billion in convertible notes.
Tech shares remained supported by Sun Microsystems . Its shares rose 3.5% after it announced its board has authorized a buyback of up to $3 billion.
Trading volumes showed 1.4 billion shares exchanging hands on the New York Stock Exchange and 1.9 billion trading on the Nasdaq. Declining issues outpaced gainers by 19 to 12 on the NYSE and by 18 to 11 on the Nasdaq.
By sector, semiconductors , real estate investment trusts , and financials led the way down, while oil and airlines advanced.
Airlines rose as Delta Air Lines Inc. stock was initiated favorably by two brokerages and AirTran Holdings Inc. announced that almost 57% of Midwest Air Group shareholders had tendered their shares in a takeover offer.
Rally to continue?
Stocks rallied Wednesday, sending the Dow to a new record high, as investors cheered stronger-than-expected industrial production data, Bausch & Lomb Inc.'s buyout by a private equity firm and speculation about a break-up of Citigroup Inc. .
The blue-chip average jumped 103 points to a new closing high.
"There is such a srong trend of taking stock private that investors are not only scrambling to find the next potential target, but are also looking for a place to put all of this liquidity to work," said Cantor's Pado.
"The result has been an exceptionally strong equity rally despite the clear overbought technical condition."
On Thursday, 24/7 Real Media rose 3.5% before the open after it agreed to be bought by Britain's WPP for $649 million, or $11.75 a share. Microsoft was reported to be interested in buying the Internet advertising firm.
"Past Memorial Day, the question will be whether we get the summer doldrums," said Oaktree's Pavlik. "But with all this private equity deals and the liquidity out there we might still get a good move higher."
Bullish investors are also betting that growth has slowed enough to contain inflation, but not enough to push the economy into recession.
On Thursday, the Philadelphia Federal Reserve said its index of regional factory activity rose to better-than-expected reading of 4.2 in May, compared with 0.2 in April. Economists surveyed by MarketWatch expected the index to rise to 3.0.
Likewise, news that jobless claims unexpectedly fell in the latest week also helped the "goldilocks" scenario of moderate growth and moderate inflation.
However, the market ignored the U.S. index of leading economic indicators, which fell 0.5% in April, compared with the 0.2% economists expected.
"The data may be pointing to slower economic conditions this summer," said Ken Goldstein, an economist for the research group.
The dollar extended its rally against the yen on Thursday after Japan's central bank kept interest rates on hold and as GDP data came in slightly below expectations.
But gold futures closed lower on dollar strength, with the June contract losing $4.30 to close at $657.20 an ounce.
Treasury bonds fell after Thursday's economic data and Bernanke's remarks. The benchmark 10-year Treasury bond dropped 12/32 to close at 97 31/32, yielding 4.757%, a one-month high.
In other news, homebuilder KB Home said it is in exclusive talks to sell its controlling stake in Kaufman & Broad for more than $800 million to PAI Partners, at a per-share price below the French builder's market value.
Drug giant AstraZeneca's $15.6 billion acquisition of MedImmune Inc. could be threatened by a lawsuit alleging the deal was structured to benefit MedImmune's senior management more than shareholders, according to a report in the Times (of London) newspaper.
By Nick Godt