Wall Street holds steady as payrolls set to test rally

Trader Dudley Devine works on the floor of the New York Stock Exchange, February 1, 2012.

NEW YORK (Reuters) - Investors largely took a wait-and-see approach on Thursday as stocks ended little changed ahead of Friday's key employment report, but tech shares rose after strong earnings from chipmaker Qualcomm.

Recent economic data suggesting the economy is on a slow but steady path to recovery has helped fuel a rally in stocks. Friday's nonfarm payrolls report, which is expected to show the improving labor market trend remained intact in January, will be a key test of the rally.

The optimism over the labor market was reinforced as new claims for jobless benefits dropped more than expected in the latest week, according to data released on Thursday.

"A decent number, and I would expect equities to continue their advance, a not decent number and we'll have a correction. It's that simple," said Frank Lesh, a futures analyst and broker at FuturePath Trading in Chicago.

U.S. employment growth probably slowed in January as temporary workers hired during the busy holiday shopping season were laid off, but the underlying picture is expected to remain relatively positive, say economists.

Nonfarm payrolls likely rose by 150,000 after increasing 200,000 in December, according to a Reuters survey. The unemployment rate is seen holding steady at a near three-year low of 8.5 percent.

Technology shares outperformed the broader market. Qualcomm Inc (QCOM.O) hit its highest level in 12 years after first-quarter profit trounced estimates. Its shares gained 2 percent to $60.73 after hitting a high of $61.95.

The Dow Jones industrial average .DJI dropped 11.05 points, or 0.09 percent, to 12,705.41. The Standard & Poor's 500 Index .SPX gained 1.45 points, or 0.11 percent, to 1,325.54. The Nasdaq Composite Index .IXIC rose 11.41 points, or 0.40 percent, to 2,859.68.

MasterCard Inc (MA.N) rose 6.7 percent to $381.57 after the payment processor beat analysts' estimates for the seventh straight quarter.

Healthcare shares were among the losers. Drugmaker Merck & Co Inc (MRK.N), the No. 2 U.S. drugmaker, said profit would be little changed in 2012. The shares fell 0.5 percent to $38.44.

Insurer Cigna Corp (CI.N) posted a lower-than-expected fourth-quarter profit, hurt by performance in its disability and life coverage business and international plans. Cigna also forecast 2012 earnings below Wall Street's target, sending shares down 3.4 percent to $44.13.

Boston Scientific Corp (BSX.N) reported lower quarterly earnings as sales declined in its two biggest businesses, cardiac rhythm management and interventional cardiology. Its shares fell 4.1 percent to $5.84.

The S&P 500 gained 4.4 percent in January, its best month since October. The index is now up over 23 percent since lows in October. Besides signs of an improving economy, gains have also been made on optimism that Europe's debt crisis is under control.

Bruce Zaro, chief technical strategist at Delta Global Asset Management in Boston, expects the current uptrend for the S&P 500 to take it to 1,370 in the first half of the year, but the index could pull back before then at around 1,330.

The wait-and-see approach was reflected in light volume. There were 6.92 billion shares traded on the NYSE, Amex, and Nasdaq compared to the 200-day moving average of about 7.76 billion shares.

Green Mountain Coffee Roasters Inc (GMCR.O) soared 23.9 percent to $66.42 a day after its first-quarter earnings far exceeded expectations.

The third warmest January in 50 years hurt same-store sales at department stores and apparel retailers. But discounters such as Target and Costco as well as high-end stores beat estimates.

Target Corp (TGT.N) rose 1.2 percent to $52.00 while Abercrombie & Fitch Co (ANF.N) slumped 13.8 percent to $40.37, and Costco Wholesale Corp (COST.O) was up 2.8 percent at $85.51.

Facebook could raise as much as $10 billion in the biggest-ever Internet initial public offering, according to a filing Wednesday. In 2011, Facebook said net income rose 65 percent to $1 billion on revenue of $3.71 billion.

(Reporting by Edward Krudy; additional reporting by Rodrigo Campos; editing by Kenneth Barry)