President Barack Obama is inaugurated Monday. Then Congress returns, and the Republican-controlled House is expected to set a vote to extend the debt ceiling limit until April 15, in an effort to temper one battle royale and turn the budget debate to spending cuts. The plan would require both the House and Senate to pass budget resolutions by then, and members' pay would be withheld if they don't pass it by the 15th.
"I think next week, the market continues to trade on earnings. I don't think we change that mode unless there is something that is very dramatic that comes out of Washington," said John Stoltzfus, chief market strategist at Oppenheimer Asset Management.
While investors are certainly becoming more bullish, the stock market's 4-percent gain since Jan. 1, and the more than 10 percent gain since November, caught some traders by surprise. The market has been looking past the debt ceiling debate, which pits the Obama Administration against Republicans who wanted spending cuts to be part of any deal. The debt ceiling limit could be reached in mid-February, and the Administration has pressed to have it extended so the government can pay its bills.
"I think this is a process. They are polarized but they are not so polarized that they can't start taking action," said Stoltzfus. He said the fiscal cliff compromise on taxes Jan. 1 was evidence of that. "It is a genuine sign, as rough as it is around the edges that that's what's happening here. You have a situation where people are making progress."
David Bianco, chief U.S. equity strategist at Deutsche Bank, said he expects Congress to work out some compromise on the debt ceiling and budget, but even if automatic spending cuts, or sequestration, occurs, it would not be terrible for the stock market. He said spending cuts need to be made in 2013, but if in the process Congress gets caught up in the debt ceiling feud and lets the U.S. credit rating get downgraded again, it could get ugly.
(Read more: House GOP Debt Ceiling Plan: 'No Budget, No Pay')
"There would be a nasty uptick in the 10-year Treasury yield," said Bianco.
"This time around if we get a ratings downgrade, and it doesn't look like we get serious about spending cuts, you no longer have that flight to safety of money from Europe like you did last time" to U.S. Treasurys, he said.
Richard Bernstein, CEO of Richard Bernstein Capital Management, said he expects the debt ceiling and budget issues to be resolved better than many expect. As for Congress, "I think public opinion is getting to the point where the debt limit thing will solve itself," he said.
The Dow gained 1.2 percent to 13,649 in the past week, while the S&P 500 gained nearly 1 percent to 1485. The Nasdaq was up just 0.3 percent to 3134. The Dow Transports, however, rose 2.2 percent to an all-time high of 5695, a move that is being watched with an eye on the Dow. If the Dow now recovers the 3.6 percent needed to reach its all-time high, some traders believe that confirming move of the industrials would signal further market gains.
(Read more: Dow, S&P Close at 5-Year Highs; VIX Plunges Near 12)
"I think we're at the point where there's kind of a change in sentiment but a very hesitant one," said Bernstein.
The VIX, the CBOE's volatility index, fell to 12.46 Friday, its lowest point in more than five years. The VIX is viewed as a kind of "fear" meter for the stock market, and it is sometimes read as a contrarian indicator.
"We're in this kind of lull because people are very confused," said Bernstein. "If you're a bear, it hasn't really played out but you're hesitant to become bullish. I think with this fiscal stuff still really rolling around here, I think people are hesitant to get bullish."
Bianco said the market is still biased to the upside, despite its recent gains.
"Even at about 1480, I think the next move is up five percent rather than down five percent," said Bianco. "We're basically saying, let it run."
(Read more: Jim Cramer: Are Stock Market Bulls Too Hopeful?)
Bianco said the market is being helped by improvement in China, besides better U.S. fundamentals, particularly in housing. "I tell investors the way I'm playing a global rebound is industrials and tech, and much lower down, energy," he said.
In the past week, the best performing sectors were energy, up 2.3 percent and industrials, up 2.2 percent. Tech was the second worst performer, down 0.5 percent. "Tech has been the sector that everybody has been talking about having huge disappointments for earnings season," Bianco said. "I read Intel's transcript and press release, but there is nothing to get panicky about. I think the tech stocks are undervalued significantly. They are trading at the same PEs as energy and banks, and obviously they have much better balance sheets and better prospects for growth."
Intel earnings fell 27 percent to $2.5 billion or $0.48 per share, and its revenues declined three percent. Intel was hurt by weak PC sales, and its stock fell 6 percent Friday.
Apple has been the big worry this quarter, and its stock has lost nearly 30 percent since its September high. It has been hounded by concerns about growth potential for its key iPhone and iPad products. Analysts expect the company to earn $13.41 per share, a decline from last year's $13.87, on revenues of $54.7 billion, according to Thomson Reuters.
Google, which missed expectations last quarter, is expected to report earnings of $10.61 per share on revenues of $12.44 billion. The miss was blamed on weaker than expected internet advertising and losses at its recently acquired cell phone business, Motorola Mobility. Google earned $9.50 per share in the fourth quarter last year.
What Else to Watch
The Bank of Japan meets Monday and Tuesday and it is widely expected to announce an inflation target of 2 percent, as well as some additional easing. The meeting is expected to be positive for dollar/yen. Japan's stock market has been rallying on the weaker yen, which fell more than 1 percent against the dollar in the past week. Japanese stocks rose 2.9 percent Friday, the biggest daily gain in 22 months.
"We've got to see how the market reacts and whether it's priced in or not," said George Goncalves, Treasury strategist of Nomura Americas. "They're not going to be hawkish. They have to follow through with something."
The dollar was lower against the euro, on the week. Treasury yields were lower Friday, with the 10-year at 1.84 percent, off the early January highs.
"We're having a hard time breaking above 1.95 — eventually 2-percent level," said Goncalves. "For me to see that happen we have to have some conviction in the market place and it has to come not only from the short-term trade but a new establishment of the trend. It has to come from an inflection point."
Goncalves said that could depend on the economic data, which has been improving. "It's getting better but it could turn south in the next couple of weeks, months. You have to have some new area of growth, not just easy money," he said.
Economists have been concerned that the first quarter may see a hit from the reversal of a two percent payroll tax cut on Jan. 1. Some expect there could be as much as a 1-percent drag on GDP in the first quarter.
"We still haven't the full effect of this fiscal drag. It's still ahead of us. Consumer sentiment today was a host across the bow. Take-home pay was less than it was. The first quarter is going to be weak."
