By Anora Mahmudova, MarketWatch

NEW YORK (MarketWatch) -- The U.S. stock market fell on Thursday, with the S&P 500 index retreating from record levels reached a day earlier, as disappointing earnings from Best Buy Co. Inc. and Citigroup Inc. dented sentiment.

The S&P 500 (SPX) dropped 5.8 points, or 0.3% at 1,842.35, easing off its record closing level reached on Wednesday.

The Dow Jones Industrial Average(DJI) shed 88 points, or 0.5%, to 16,392.48. The Nasdaq Composite(RIXF) was off 1 point in choppy trade at 4,207.29.

After a two-day rally, which took the S&P 500 to a record close, cautious mood prevailed as investors piled into defensive stocks and sold off cyclicals. Follow stock market live blog.

Uri Landesman, president of Platinum Partners, said a market correction is long overdue, and when it starts, the slide could be exacerbated given the big paper profits that investors have.

"The economy is surprisingly strong and earnings are fairly good and the markets are priced to perfection. But at this point, markets are extended, as they have been going up almost in a straight line since March of 2009. There is no support level: If the markets start sliding there won't be much resistance and the fall maybe quite drastic," Landesman said.

Investors digested disappointing results from electronics retailer Best Buy and Citigroup as well as economic data that generally met expectations.

Best Buy (BBY) plunged 27.4% after the retailer reported unexpectedly disappointing holiday sales. The CEO called it a "speed bump."

Citigroup Inc. (C) shares were down 4.1% after bank's fourth-quarter earnings missed Wall Street estimates.Read David Weidner's take on the results.

Goldman Sachs Group Inc. (GS) shares fell 2.1% after the bank announced a sharp drop in profits due to falling trading revenues.

During an interview with Liaquat Ahamad, Fed Chairman Ben Bernanke defended the response to the financial crisis and said stock market valuations are within historic range. Commenting about the central bank's bond purchases, known as quantitative easing, he said: "The problem with QE is that it works in practice but it doesn't work in theory."

Earlier, in a paper delivered at a Brookings Institution seminar on U.S. monetary policy, San Francisco Fed President John Williams warned of "nagging concerns that large-scale asset purchases carry with them particular risks to the economy or the health of the financial system that we still don't fully understand."

He also said the central bank's new forward-guidance tool seems "overly simplified and prone to misinterpretation."

In economic news, the number of Americans who applied last week for unemployment benefits fell slightly and is now back to a level that prevailed shortly before the Thanksgiving holiday, broadly in line with economists' forecasts. Separately, U.S. consumer prices rose a seasonally adjusted 0.3% in December, led by higher energy and shelter costs, the Labor Department said. The overall and core inflation numbers were also in line with expectations.

Shares of asset manager BlackRock Inc. (BLK) rose 3.6% after the firm said profit jumped 22% in the fourth quarter, as the amount of money it manages climbed 14%. The firm also raised its quarterly cash dividend to $1.93 per share.

Yahoo Inc. (YHOO) said after Wednesday's closing bell that Chief Operating Officer Henrique de Castro is leaving the company, effective Thursday. Shares dropped 2.6%. Read commentary: Yahoo COO exit may be a bad sign for fourth quarter.

SolarCity Corp. (SCTY) climbed 10% after Deutsche Bank analysts initiated coverage of the solar company with a buy rating and a $90 price target, according to news reports. Fellow solar company First Solar Inc. (FSLR) gained 1%.

Zoom Technologies Inc. (ZOOMD) revved up 27.6% as the tiny Chinese mobile and telecommunications investor rubber-stamped a deal late Wednesday to buy an online business travel provider.

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