Stocks pulled back on Thursday, as 50 state attorneys general are looking into allegations that thousands of home foreclosures were improperly handled. Financials were hard hit with both big banks and regionals falling on the news.

JPMorgan Chase & Co. (NYSE: JPM) fell 2.6%, Bank of America Corporation (NYSE: BAC) was off 5.2%, and Wells Fargo & Company (NYSE: WFC) fell 4.2%. Regional banks like BB&T Corporation (NYSE: BBT) and SunTrust Banks, Inc. (NYSE: STI) fell 2.14% and 4.23%, respectively.

The U.S. jobs data was expected to show improvement, but instead indicates that the recovery is stubbornly slow with regard to jobs.  Initial claims for the week ended Oct. 9 totaled 462,000, up 12,000 from expectations. Continuing claims fell 112,000 week-over-week to 4.4 million.

The producer price index for September increased 0.4%, which is above the 0.2% that was forecast. Excluding food and energy, producer prices increased by just 0.1%.

In corporate news, Yahoo! Inc. (NASDAQ: YHOO) rose 4.5% following a Wall Street Journal article that reported that AOL and several other equity companies are considering a possible takeover of the company. And Verizon Communications Inc. (NYSE: VZ) said that it will sell Apple Inc.’s (NASDAQ: AAPL ) iPad. It will be the first Apple product to be sold by Verizon. 

The trade deficit increased in August to $46.3 billion, up from the $42.6 billion in July. Economists had predicted a deficit of $44.5 billion. The U.S. dollar fell again against a basket of currencies and to a new 15-year low versus the yen, and China’s yuan rose to the highest point against the dollar since the yuan began regular trading in 1994. The euro rose to $1.4123 at one point in the day and closed at $1.4072.

At the close, the Dow Jones Industrial Average was off 2 points at 11,095, the S&P 500 fell 4 points to 1,174, and the Nasdaq was off 6 points to 2,435. The NYSE traded 1.1 billion shares with decliners ahead of advancers by about 1.5-to-1. On the Nasdaq, decliners were slightly ahead of advancers on volume of 557 million shares.

Crude oil for November delivery fell 32 cents to $82.69 a barrel following a government report that domestic demand for petroleum products fell to the lowest level in nearly a year. The Energy Select Sector SPDR (NYSE: XLE) fell 9 cents to $59.05.

Gold bounced back after several days down. The December contract rose $23.80 to settle at a new record, $1,375.70 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) fell 1.28 points to 208.36.

What the Markets Are Saying

If all investors saw were the closing stats of Thursday’s trading, they would think that it was a quiet, low-volatility affair with few worries and a flat close. But nothing could be further from the truth. 

The Dow Industrials opened lower on bad bank news, but by 10:30 a.m., the losses had been erased and stocks were up by about 20 points. But the high couldn’t hold in the face of the lower jobs numbers, and by 3 p.m., the index was off by 75 points. Then, at the low, the dollar sagged and bargain hunters emerged to drive the industrials back to within 2 points of Wednesday’s close. 

Along with the volatility, there were several interesting technical features to consider. First the Dow turned away from the psychologically important 11,000 line like a cat on a-hot tin roof as the low of the day came within 23 points of the big round number. And second, the S&P 500 closed exactly on the flash crash rebound high of May 13, which I mentioned earlier this week as an important first line of support. So on a day in which it was difficult to find a shred of good news, aside from a couple of positive earnings reports, the bulls measured up to the test.

But even so, stocks still must surmount the April high and one of our internal indicators, the slow stochastic, flashed a short-term sell signal. And the American Association of Individual Investors (AAII) survey was released yesterday, showing a drop in bullishness by their members of 1.9% to 47.1%, which is still much too high for this contra-indicator. AAII points out, “This is the sixth consecutive week that bullish sentiment has been above its historical average of 39%.”

Now all of this may mean little and even seem overly cautious. And the indices could continue to make a run at the next significant resistance, which is 1,200 for the S&P 500. Or it could lead to a minor pullback ending at the support zone at 1,150 to 1,174 we would again be strong buyers. But after such a powerful run that is, after all, caused by inflationary concerns and a proposed push by the Fed, it is wise to maintain protective measures that will preserve hard-earned gains and trading goals strategies alike.

As for trading strategies, when approaching an area of significant resistance, like S&P 1,200, it is wise to cut down on the size of new positions and take smaller profits rather than going for the home run. Such resistance zones are there because investors sold at these zones before. A swing for the fences while facing a wall of sellers could turn into a triple play rather than a four-bagger.

For one play that looks solid here, see the Trade of the Day.

Today’s Trading Landscape

Earnings to be reported before the opening: First Horizon, Gannett, General Electric, Genuine Parts, Infosys, Knoll, Mattel and Webster Financial.

Earnings to be reported after the close include: WD-40.

Economic reports due: consumer price index (the consensus expects 0.2%, and 0.1% ex-food and energy), retail sales (the consensus expects 0.5%, and 0.4% ex-autos), Empire State Manufacturing Survey (the consensus expects 8), consumer sentiment (the consensus expects 69), business inventories (the consensus expects 0.4%), and Treasury budget (the consensus expects -$32 billion).

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.