Wall Street drops as profit taking offsets bullish data

NEW YORK (Reuters) - Stocks slipped on Thursday as investors took profits at the end of an exceptionally strong September and a robust quarter, while losses were curbed by encouraging data on economic growth and the job market.

Investors seemed torn as to whether end-of-quarter positioning or the data should set the market's direction, resulting in a volatile session. After up and down moves of nearly 1 percent, equities hovered close to unchanged territory in afternoon trading.

In the S&P 500's biggest monthly gain since March 2000, the benchmark index surged nearly 9 percent in September on signs of economic stabilization and expectations that the Federal Reserve will take steps to accelerate the recovery. The September rally has defied the month's track record of being historically the worst for stocks. In the third quarter, which also ends today, the S&P 500 is up almost 11 percent.

"After the move we've seen in September and this quarter, there's going to be a lot of profit taking, especially from larger institutions," said Jeff Morris, head of U.S. equities at Standard Life Investments in Boston.

Initial jobless claims fell sharply in the latest week, pointing to modest strengthening in the labor market, while the Commerce Department revised higher its final read on second-quarter economic growth.

That backed up stronger readings for regional business activity indexes in New York City and the U.S. Midwest, seen as early indicators before national surveys on Friday and later next week..

"There wasn't much to be disappointed in with the data, but in order to have greater confidence in the market, you'll need to see claims drop and real employment growth," Morris said.

Semiconductor companies, a growth sector that advanced during the quarter, ranked among the day's losers and weighed on the Nasdaq.

SanDisk Corp slumped 2.9 percent to $36.56 and was the biggest loser in the Nasdaq 100 <.NDX>. The Philadelphia semiconductor index <.SOX> fell 0.6 percent.

The Dow Jones industrial average <.DJI> shed 38.56 points, or 0.36 percent, to 10,796.72. The Standard & Poor's 500 Index <.SPX> slipped 1.78 points, or 0.16 percent, to 1,142.95. The Nasdaq Composite Index <.IXIC> declined 4.08 points, or 0.17 percent, to 2,372.48.

The S&P fell under the 1,150 level, which has been a resistance point earlier this week and coincides with highs reached earlier this year.

In the options market, bearish activity was detected in Micron Technology Inc about a week before its quarterly results, and in Dell Inc , as some investors appear to be taking defensive positions.

"Option plays in both Dell and in Micron Tech today appear to be investors protecting their recent gains in these respective stocks," said Joe Kinahan, TD Ameritrade's chief derivatives strategist.

"The common thread in both of these tech stocks is that investors are nervous after a spectacular September for stocks and are looking for ways to hedge their positions and still enjoy further upside if we continue to rally."

The Dow's biggest advancer was Boeing Co, up 1.3 percent at $66.83 after the aircraft manufacturer said its full-year results would not be hurt by its delaying the first delivery of its 747-8 Freighter, its biggest commercial jet.

American International Group Inc rose 3.5 percent to $38.76 after the insurer and the U.S. government unveiled a plan for the company to repay its $182.3 billion taxpayer bailout.

Prudential Financial Inc shares fell 3.9 percent to $54.32 after it agreed to buy two Japanese life insurance units from AIG for $4.2 billion.

Investors' attention has turned to Federal Reserve Chairman Ben Bernanke, who testified before a Senate Banking Committee hearing on implementing the recently passed financial regulation act.

(Reporting by Ryan Vlastelica; Additional reporting by Doris Frankel; Editing by Jan Paschal)

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