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Wall Street backed a few steps away from two-year highs on Thursday as the bulls play it safe in the wake of an unexpected surge in weekly unemployment claims and tumbling drug stocks.

Today's Markets

The Dow Jones Industrial Average fell 23.54 points, or 0.20%, to 11731.90, the Standard & Poor's 500 slipped 2.20 points, or 0.17%, to 1283.76 and the Nasdaq Composite slid 2.04 points, or 0.07%, to 2735.29. The FOX 50 declined 1.84 points, or 0.20%, to 918.02.

There were a number of negative storylines putting pressure on stocks, including the worse-than-expected weekly unemployment report, a 7% dive for shares of Merck (NYSE:MRK) and a warning about the U.S. credit rating. Despite that gloomy picture, the bulls on Wall Street largely held their ground.

Underscoring just how bullish the markets have been in recent weeks, the stocks' relatively modest slide (none of the major indexes were even off by 0.3%) still marked one of their worst days since November 30.

Even with Thursday’s decline, the S&P 500 is still on track for its seventh straight weekly gain -- its longest such streak since May 2007, seven months before the Great Recession began.

“Let’s face it, the S&P has been trading like a balloon underwater -- the entire U.S. equity market has,” Tres Knippa of told FOX Business, crediting the Federal Reserve's easy-money policies. “As long as we stay awash in liquidity, I don’t see any reason why we would make a major turn.”

Just over half of the Dow's 30 stocks lost ground, led by aluminum maker Alcoa (NYSE:AA) and Merck, which announced a setback for a key cardiovascular drug. The blue-chip index's best performers were Home Depot (NYSE:HD) and Verizon (NYSE:VZ).

Ahead of Intel's (NASDAQ:INTC) highly-anticipated results, the Nasdaq Composite ended nearly flat, lifted by modest gains from tech heavyweights Research in Motion (NASDAQ:RIMM) and (NASDAQ:AMZN).

The mini slide comes after Portugal's successful bond auction and an upgrade of the U.S. banking sector sent the Dow soaring more than 80 points on Wednesday to its highest level since August 2008.

Wall Street managed to avoid a knee-jerk selloff after the Labor Department said the number of people filing for unemployment benefits unexpectedly surged by 35,000 last week to 445,000, surprising economists who had predicted a slight decline. However, the government warned the increase could be related to seasonal distortions around the holidays. Continuing claims declined by 248,000 to 3.88 million. 

The worse-than-expected weekly report comes on the heels of Friday's worse-than-expected December jobs report that failed to live up to high expectations.

Health-care stocks were among the biggest losers as drug giant Merck tumbled after saying it has stopped giving its highly-anticipated blood clot preventer Vorapaxar to patients in one study and some in another trial. The announcement casts a shadow over a drug thought to have multibillion-dollar potential. Other drug stocks like Pfizer (NYSE:PFE) and Novartis (NYSE:NVS) also retreated.

Wall Street woke up to a warning from the two leading credit ratings saying the U.S. will need to reverse the upward trajectory in its debt ratios if it wants to hold onto its coveted triple-A credit rating. S&P didn't rule out lowering its outlook on the U.S. from stable. While the warnings weren't exactly surprising, they served as another reminder about the U.S.'s soaring debt levels.

Offsetting the gloom from those factors, the euro blew past $1.33, rallying for the fourth day in a row as Spain saw strong demand in its $3.94 billion auction of five-year bonds. The solid sale, which needed a higher yield, came in the wake of Portugal's $1.6 billion bond sale and helped send European bonds sharply higher and the euro soaring 1.62% to $1.3345. Stocks and commodities tend to benefit from a weaker U.S. dollar because that makes exports more attractive.

Also, tech traders were anxiously awaiting quarterly results from Intel, which is slated to kick off the tech earnings season by revealing record earnings after the bell.

In the commodities complex, crude oil snapped its three-day win streak, sliding 46 cents a barrel, or 0.50%, to $91.40. Gold gained $1.20 a troy ounce, or 0.09%, to $1,386.90.

Aside from the unemployment report, Wall Street had little reaction to the day's other economic headlines.

The Labor Department said producer prices jumped by a hotter-than-expected 1.1% in December, the biggest monthly gain since January and the sixth-straight increase. However, excluding food and energy, producer prices increased by an in-line 0.2% in December. 

In another negative, the Philadelphia Fed revised its manufacturing index from December from 24.3 to 20.8 amid lower new orders and employment.

On the other hand, the government said the U.S. trade gap narrowed for the third month in a row to $38.31 billion, coming in well below the $40.7 billion that had been projected. Exports rose 0.8%, while imports grew by 0.6%.

Corporate Movers

General Electric (NYSE:GE) scooped up power-conversion infrastructure company Lineage Power from private-equity firm The Gores Group for $520 million. GE sees the deal closing in the first quarter and as a way to capitalize on the $20 billion annual power conversion space.

Marathon Oil (NYSE:MRO) revealed plans to spin off its refining and pipeline operations to create two independent companies, sparking a 6% rally in its stock. Marathon said it plans to create a new company on June 30 called Marathon Petroleum that will house its downstream business and become the fifth-largest U.S. refiner.

Infosys Technologies (NASDAQ:INFY) slumped 7% after the Indian software said it earned 17.8 billion rupees last quarter, missing the Street's view of 18.2 billion rupees. Infosys said its revenue increased 23.8% to 71.06 billion rupees, also trailing forecasts. The Indian company also warned the weaker economic recovery, high unemployment and risk of sovereign default could hurt its growth.

Global Markets

The U.K.'s FTSE 100 declined 0.44% to 6023.88, Germany's DAX gained 0.09% to 7075.11 and France's CAC 40 jumped 0.75% to 3974.83.

In Asia, Japan's Nikkei 225 rallied 0.73% to 10589.80, Hong Kong's Hang Seng advanced 0.47% to 24239 and China's Shanghai Composite gained 0.23% to 2827.71.