Stocks will struggle with a heavy dose of bad earnings news that could dash investor hopes for an Obama rally in the week ahead.

Earnings news from Citigroup and Bank of America are the big hurdles ahead of Friday's opening bell.

Those two reports have been dreaded by investors, who fear revelations of new writedowns and losses. Both banks have been in the news this week, and speculation surrounding them has contributed to the market's gloom. The S&P financial sector lost another 5.8 percent Thursday as Bank of America declined 18 percent into the single digits and Citigroup lost another 15 percent.

Both banks also moved up their earnings release dates from next week, following a similar move by JP Morgan which reported better-than-expected results Thursday. Citigroup is expected to report a loss of $1.25 per share, but some analysts expect worse. The expectations for revenues for the fourth quarter are $14.1 billion, nearly double the poor showing in the year earlier quarter. Investors are also hoping for a glimpse at Citi's future plans when it talks to investors in an 8 am conference call. After its spinoff of its Smith Barney unit into a joint venture with Morgan Stanley , it is expected Citi will target other assets for sale.

Bank of America, which acquired Merrill Lynch Jan. 1, is expected to also explain a new deal with the government when it reports earnings at 7 am Friday.CNBC's Steve Liesman reports that Bank of America has struck a deal with the governmentwhich would guarantee up to $120 billion of its debt and inject it with new capital. Bank of America was expected to have earned $0.01 per share, on revenues of $20.7 billion. The new plan to backstop Bank of America is similar to one the government crafted for Citigroup late last year.

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On Thursday, Citi was surrounded by rumors that it had deteriorated so much that it was in talks with the government to nationalize the bank. However, Citi denied the rumor to CNBC's Charlie Gasparino.

Stocks recovered from their session lows in the afternoon Thursday, before closing slightly higher. "You had Citigroup denying they were in talks about the defacto nationalization of the bank. That was the big overhang going into the weekend. We had been hoping to get a little inauguration bounce,' said Peter McCorry of Keefe Bruyette.

Also Thursday, Democrats revealed details of their stimulus proposal, and the Senate approved release of the remaining $350 billion in Troubled Asset Relief Program funds, as requested by President Bush.

The Dow closed up 12 points at 8212, after dipping down below 8,000 to an intraday low of 7,995. The S&P 500 rose 1 point to 843, and the Nasdaq rose 22 points, or 1.5 percent to 1,511.

The dollar edged up slightly against the euro and a bit more against the yen. Long-dated Treasurys continued to attract buyers, knocking the yield on the 10-year to 2.203 percent.

Oil continued its decline, losing $1.88 per barrel, or 5.04 percent, to $35.40.

Econorama

The markets will also focus on the consumer price index, reported at 8:30 am ; industrial production, at 9:15 am and consumer sentiment at 9:55 am Treasury international capital flow data is released at 9 am.

Richmond Fed President Jeffrey Lacker speaks on financial conditions at 12:15 pm.

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Intel , meanwhile, reported a 90 percent drop in profit, but the company's shares rose in afterhours trading. The company had warned the economy took a bite out of its profits and hurt its ability to forecast. Intel said it could not give an outlook on revenues but said, for internal purposes, it was using $7 billion as an estimate.

But later on a conference call, Intel said it believes its lowered margins will trough in the first quarter. Intel officials were also reported to have said channel inventories fell dramatically in the fourth quarter and that trend will continue in the current quarter, but they believe it will slow and improve in the second quarter.

Genentech earnings rose 47 percent to $931 million or $0.87 per share but were still below expectations. After the bell, its stock slid.

Miracle on the Hudson

Everyone will watch with fascination for new developments in the Hudson River landing Thursday of the U.S. Airways jet bound for Charlotte, N.C. from New York's LaGuardia Airport. After the jet apparently hit a flock of geese, the pilot safely landed the plane on the surface of the river and all 155 people aboard were evacuated before the jet sunk. N.Y. Gov. David Paterson said it was a miracle on the Hudson. Indeed.

Wall Street feels a little like a beach town bracing for a hurricane. Maybe it will hit. Maybe it won't. But the winds have picked up.

Thursday's markets will face JP Morgan earnings, producer inflation data, weekly jobless claims, and the current quarter's first economic headlines in the Philly Fed's report and the Empire state manufacturing survey. Europe's central bank decides on interest rates before the New York open, and Congress will vote on releasing TARP funds to aid the ailing banking sector.

Stocks had their worst day of the young year Wednesday and their biggest drop since Dec. 1. The Dow tumbled 248 points, or 2.94 percent to 8200. The S&P 500 slid 29 or 3.35 percent to 842, and the Nasdaq was down 56 percent or 3.7 percent to 1489. Banks once more led the decline, falling 5.7 percent, and investors fled to the safety of Treasury bonds.

"We started off getting a New Year's bounce. That has so far fizzled and what's starting to unfold is another wave of investors fleeing the markets," said Brian Dolan, chief currency strategist at Forex.com. "I'd be looking for another flight to the dollar and flight to U.S. Treasurys."

Dolan said the charts he watches show a sell signal for stocks. "I'm just seeing these pieces add up to what could happen here. There's nothing good coming down the pike so that's likely to mean another dollar safe haven bid and stock markets get hit," he said. Dolan expects the European Central Bank to cut rates by a half pointThursday, and ECB President Jean Claude Trichet is likely to voice openness to further cuts, a move that should boost the dollar against the euro.

Stocks in the News

After-the-bell news from Apple and on Bank of America could weigh on stocks in the morning. Apple said its founder and CEO Steve Jobs is taking medical leave until July. Just last week, Jobs assured investors his health was not a major concern and that his weight loss was from an easily treated hormonal imbalance. But he stepped aside Wednesday due to more complex health issues, leaving COO Tim Cook in charge amid questions about the company's succession planning and disclosure practices.

Apple fell sharply, but recovered some of its losses in late trading.

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Bank of America also slumped after the Wall Street Journal reported it was in talks to get billions more from the government to help with its acquisition of Merrill Lynch . The story, quoting sources, said discussions started in mid-December for the additional funding. Citigroup, also in the news, already took its second helping of government bailout funds. Citigroup shares were down more than 20 percent amid reports the banking company would sell assets to raise capital.

Citi announced a deal Tuesday to spin off its Smith Barney brokerage into a joint venture with Morgan Stanley . Citigroup Wednesday said it would speed up the release of its earnings by about a week, and now expects to release them Friday. It is also expected to clarify its plans to reshape the company that day.

Worries about the banking sector and its need for more capital have plagued stocks this week. Oppenheimer analyst Meredith Whitney, appearing on CNBC's "Closing Bell," said she thinks banks will be in trouble until 2010. Whitney has said the industry needs way more capital than its taken from the government so far, and they will sell some of their most attractive assets.

"Banks, at a minimum have to catch up on a reserve basis," she said. Whitney added banks have calculated the peak to trough in housing at too low a level and are planning for an U.S. unemployment rate that has already been surpassed.

"I think they can go lower before they go higher. That, I think, is a kind of way of saying I'd diversify out of financials here," Whitney said. JP Morgan is expected to report break even results Thursday but some analysts are expecting a loss. Traders say there are rumors of writedowns surrounding all bank stocks.

All of this focus on banks came as the appointment of Timothy Geithner as Treasury Secretary was delayed until after the inauguration. Senators are questioning his failure to pay self-employed taxes while working at the IMF. The uncertainty around Treasury Secretary, a key role in the government's financial rescue operations, is likely to add to the market's uncertainty if it is not resolved soon. The Senate Banking Committee will hold a heaing on other economic appointments Thursday, including Mary Schapiro for SEC chairwoman.

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Econorama

Brown Brothers Harriman chief currency strategist Marc Chandler said he's watching the producer price data closely Thursday. "Tomorrow and Friday, our inflation numbers are going to be confirming that we're actually going to have deflation. There's going to be a negative reading year-over-year. It'll be the first time in the cycle. PPI will go negative by around one percent or so," said Chandler. CPI is reported Friday.

Chandler said the fourth quarter is expected to be dismal, with GDP a negative five or six percent. Many economists expect the fourth quarter to be the trough in the current recession. "Things are going to get worse before they get better," he said. He pointed out that the stock market has retraced half the gains made since Nov. 21 and the earnings period has just begun.

He said the Empire State manufacturing data and the Philadelphia Fed survey are of greater interest than usual. They are the first data that is measuring January and the start of the first quarter. Chandler said he is hoping to see some stabilizing in first-quarter data as it is released in the coming weeks. "It will still point to a horrific economy..but we need to see some data that shows moderating."

Chandler expects the dollar to continue its upward bias against the weakening euro and Eurozone economy. "I'm bullish on the dollar not because there's good things happening here," he said.

The dollar rose slightly against the euro to a level of $1.3160 per euro. The greenback was nearly flat against the yen. In the bond market, the yield on the 10-year slid to 2.215 percent while the two-year's yield slid to 0.722, its lowest level since Dec. 18.

Crude on the Nymex fell $0.50 per barrel Thursday, or 1.32 percent to $37.28 per barrel. Traders across the markets are watching the weakness in oil, which has continued to tumble on falling demand and has become the symbol for the weak global economy. The S&P energy sector was one of the worst performing stock groups, falling more than 4 percent Wednesday.

Whither Stocks

Patrick Kernan, who trades S&P 500 options, said investors should beware of the volatility around options expirations this week. "There was a lot of volatility buying right out of the gate," he said of Wednesday's trading. He said options investors were buying long dated options, for June, September and December. "They're positioning themselves for months of volatility, as opposed to weeks of volatility," he said. Kernan added that investors are also moving into the VIX, the CBOE volatility index, which traded above 50 Thursday.

Known as the market's fear gauge, the VIX finished at 49.14, up 13.6 percent, its highest level since December.

Earnings Central

Two important earnings reports come after the bell Thursday when Genentech and Intel report.

Questions? Comments? marketinsider@cnbc.com

Bad news on the economy could trip up markets Wednesday, but traders say they already expect the worst and it may not matter.

Retail sales are reported at 8:30 a.m. Wednesday and are expected to show a decline of 1.2 percent for December. The number could be even weaker based on the dismal sales reported by chain stores last week. Import prices are also reported at 8:30 a.m., and business inventories are at 10 a.m. The Fed's beige book on the economy is released at 2 p.m.

"The retail sales numbers are going to be a disaster. I don't think that's news to anybody," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "So it's a question of how much worse they are than expectations, and if there are any serious downward revisions. With the beige book, you would expect it to corroborate the collapse in activity and also be very negative."

"The question is - has the market priced it in? We'll see," said LaVorgna.

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Economists have been expecting all data from December and the fourth quarter to be very weak. LaVorgna said he expects GDP, reported at the end of the month, to contract by 6.5 percent in the fourth quarter.

"But in light of the trade number it's conceivable that the economy won't shrink that much, but regardless, it's going to be horrible," he said. Tuesday's report of a much smaller than expected trade deficit was a surprise. The trade balance with the rest of the world declined to $40.4 billion on a record drop in oil prices and weaker demand for imported goods. Economists had expected more than $50 billion.

Stocks were mixed Tuesday with the Dow falling 25 points to 8448, and the S&P up 1.53 points at 871.79. The Nasdaq was up 7.67 points, or 0.5 percent to 1546.46. Financial stocks sold off early in the day, but the sector stabilized and turned higher, to finish up 1.35 percent. The worst performers were the industrial sector and utilities, down two percent.

Buying in bonds pushed the yield on the 10-year lower to 2.301 percent. The dollar rose 1.4 percent against the euro at $1.3190 per euro. It was up very slightly against the yen.

Oil Drill

After five days of declines, oil rose $0.19 per barrel to $37.78. Comments from the Saudis made about production cuts and a blast of cold weather in the U.S. helped sentiment.

Oil and gasoline inventory data is scheduled for release at 10:30 a.m. Wednesday. Platts survey of analysts shows expectations for a three million barrel build in U.S. crude stocks. Gasoline stocks are expected to be up 1.8 million barrels.

Trouble or a Bump in the Road?

Stocks Tuesday shrugged off reports that Senate finance committee members were speaking to President-elect Barack Obama's choice for Treasury Secretary about tax issues and the work authorization of a former housekeeper. Incoming press secretary Robert Gibbs said Tim Geithner made honest mistakes and that he is the right person to head Treasury. Geithner's immigrant housekeeper was temporarily without legal status but later applied for a green card and was never charged. He also did not pay social security or Medicare payments when he worked as a consultant for IMF. But he paid the taxes and interest when alerted by the Internal Revenue Service.

"All in all, everything went fine. I don't think there's a problem with any of these confirmation hearings," said Tim Smalls of Execution after the Senate members met.

Smalls said the market had staged a rally based on the Obama economic team and any problem with Geithner, who headed the New York Fed during the financial crisis, would be a big problem for markets. "Let's put it this way, we'll watch with cautious optimism," he said. Geithner's confirmation hearing is Thursday.

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Citigroup and Morgan Stanley announced they were merging their brokerage operations into a new joint venture. The move will give Citi $2.7 billion from Morgan and take Citi a step closer to a major overhaul of its business model.

Yahoo named Autodesk's Carol Bartz as its new CEO. Yahoo president Sue Decker will leave the firm after a transition.

Xilinx reports earnings after the bell Wednesday.

Scam of the Century

Ponzi scamster Bernie Madoff again appears in court Wednesday as prosecutors once more try to get him thrown in jail.

Questions? Comments? marketinsider@cnbc.com

The fourth-quarter earnings season has barely begun, and Wall Street's already cranky mood is getting worse.

Alcoa , the first Dow component of the earnings season, reported a wider-than-expected lossfor the quarter Monday in its after-the-bell release. Its poor showing followed a day in which financial shares had their worse sell off in weeks on fears of big losses when that sector reports earnings next week. Also, details from the Obama Administration on how financial firms taking government funds could be restricted also hurt shares.

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Tuesday's markets will weigh a speech by Fed Chairman Ben Bernanke ahead of the open. Bernanke speaks at the London School of Economics and takes questions after his 8 a.m. ET talk, entitled "The crisis and policy response." Traders will watch this for clues as to what other moves the Fed may make in an environment where it has essentially taken interest rates to zero.

International trade is reported at 8:30 a.m., and the NFIB small business survey is released at 7:30 a.m.

TARP-edoed

The markets will also be following an afternoon hearing of the House Committee on Financial Services on the Troubled Asset Relief Program (TARP). Fed Vice Chairman Donald Kohn is among those appearing before the committee.

President Bush, at the request of President-elect Barack Obama, asked Congress Monday to approve release of the remaining $350 billion in TARP funds. Former Treasury Secretary Larry Summers, incoming director of the White House National Economic Council., said in a letter that the TARP funds should help prevent foreclosures, ease up lending, but also limit dividends and executive pay for banks taking the funds. Financial stocks were already under pressure on concerns about earnings and fears that Citigroup could report a huge loss next week.

The S&P financial sector finished down 5.7 percent. Citigroup was one of the worst performers, down more than 18 percent. Citigroup is in discussions to merge its brokerage operations with those of Morgan Stanley in a joint venture, and a deal could be announced this week. Some traders see the spin out of Citi's Smith Barney operation as a precursor to other moves to pare down the financial giant as it struggles to rebuild its capital.

"I think there's a lot of second thinking about this magical merger," said Art Cashin, director of floor operations at UBS.

Stocks to Watch

The Dow Monday fell 125, or 1.46 percent to 8474. The S&P 500 slid 20 points, or 2.26 percent to 870.

In the after-hours session, J.P. Morgan shares rose after traders saw its announcement it would release earnings this Thursday instead of next Wednesday as a boost to confidence. Alcoa moved slightly higher after it reported a $1.2 billion loss, its first loss in six years. The stock had been under pressure during the trading day on negative comments from an analyst.

CSX , though, fell after the bell when it warned fourth quarter earnings would be below expectations.

Return of Fear

Worries about the health of financial companies paralleled fresh fears about the credit crunch and weakness of the global economy. Those concerns showed up in a sell off in commodities markets, where gold, copper, and oil all fell. Oil was down 8 percent to $37.79 per barrel.

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The dollar, meanwhile, was higher against the euro , but the yen gained as investors showed aversion to risk assets. Bond prices were mixed. Buying in the 10-year pushed its yield to 2.31 percent from Friday's 2.40 percent.

The Hunker Down Trade

Brian Belski, Merrill Lynch U.S. sector strategist, released a note Monday advising investors to trim low quality gains. He wrote that stocks in the S&P with the lowest quality ranking outperformed those with highest rankings by 30 percentage points since November's lows. Stocks with higher leverage outperformed those with lower debt levels by 10 percentage points during the same period.

Belski said investors should focus on sectors with low leverage and a way to fund themselves. He said discretionary, staples, health care, technology and materials have done the best job deleveraging over the past 10 years. Health care and technology have done the best job growing cash as a percentage of assets in that period, and as a result are best positioned to handle the credit crunch.

"You had a big rally in low quality even though spreads have not come in materially," he said in a phone interview. Belski said the turn to low quality can sometimes lead a recovery. "But what you've seen in the last couple of days is people are trying to get out of these."

"There's a very good chance that the deep downward bent to the market is not going to be around in 2009, but volatility is here to stay," he said. "Part of it is investors when they see a gain, they want to take it and protect it."

Questions? Comments? marketinsider@cnbc.com

Stocks in the coming week will start to navigate a mine field of fourth quarter earnings reports and economic data, none of which is expected to be good.

The December jobs report has been hanging over the markets like a dark cloud all week.

Its importance has grown larger by the day as economists ratcheted up their expectations for job losses. The consensus is for a decline of 515,000 non farm payrolls and an unemployment rate of 7 percent, but some are now expecting declines of well over 600,000 when the report is released at 8:30 a.m. Friday.

The employment picture is one of the scarier economic indicators of this recession because it is still unclear where the bottom is and how bad it will become. It is an indicator that can generate its own snowballing effect. If consumers are scared about losing their jobs, they don't spend. If they don't spend, business activity stalls, and companies have no choice but to layoff workers.

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The ADP private sector jobs survey spooked markets Wednesday when it showed job losses could be worse than expected. But also interesting was a report, released Thursday, on small business employment.

The National Federation of Independent Business said the December decline in employment in its economic survey of small businesses was at the highest level in the monthly survey's 35-year history. NFIB said small business has been responsible for 60 to 80 percent of U.S. job growth in the last decade, and now it says more firms plan to reduce employment more than hire.

Small businesses were laying off an average of 0.86 workers per firm, and 26 percent reduced employment by an average 4.2 workers. The NFIB said its small business members average one to nine employees.

Many small businesses are in retail and were hit by the consumer slowdown. "By the time they finished November, it was pretty clear the consumer was not going to ride to the rescue," said William Dunkelberg, NFIB chief economist. "If 80 percent of their costs are people, to save themselves, they have to cut labor."

Dunkelberg said small businesses, more than large corporations, tend to hold onto employees longer in tough times for a couple of reasons. "One is they're really small and it's personal. Two, they're much thinner in terms of man power and staffing, and I think they have a lot more informal cross training so they tend not to let these people go," he said.

Markets Mayhem

After Wednesday's big decline, stocks pedaled sideways with a mixed return Thursday. "I'm kind of surprised they closed close to their highs. You have a great big number coming tomorrow," said one trader, who noted the chain store news released Thursday was enough to keep the market under water. "It was another really slow day and a really slow week."

Traders said it was a positive though that stocks did not close lower after Wednesday's 3 percent selloff in the S&P 500. The S&P 500 held above the important 900 level, rising 3 points to 909. The Dow was off 27 points, at 8742. Wal-mart , a Dow component, fell sharply after it reported weaker than expected sales and lowered its earnings outlook. Nasdaq though was up 1.2 percent, helped by Sears positive earnings forecast and Microsoft .

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"I think the market acted very well after a tough sell off yesterday. The selloff was healthy. We're backing and filling," said Todd Leone of Cowen.

"The Citibank deal came out and the market rallied a bit," he said. News that Citigroup became the first bank to support a plan to let bankruptcy judges alter mortgages to prevent foreclosures was released during the midafternoon.

Traders offer several scenarios for the market's potential responses to Friday's jobs data. One is that the market is too fragile, and it will react poorly to bad news. Another view is that it reacts well because the bad news is already expected. And thirdly, it springs higher on better than expected news.

Investors will also be watching for earnings guidance Friday, ahead of next week's start to the earnings reporting season. Chevron, after the bell, warned its earnings would be significantly lower.

Credit Thaw

Credit markets, meanwhile, continued to show improvement. Spreads across many parts of the credit market narrowed this week. MKM's Michael Darda pointed out Thursday that the two-year interest rate swap made an important move to a level not seen since the summer of 2007, when the credit crunch began.

"This is important because swap spreads tend to lead other areas of credit as well as other risk assets," he said in a note.

There are other signs of improvement too. The commercial paper market expanded by $83 billion. Corporations continued to tap the debt market, and markets from high yield to commercial mortgages have shown improvement as investors showed a willingness to take on more risk.

Mortgages bonds guaranteed by Freddie Mac and Fannie Mae rebounded Thursday. The Fed disclosed that it had bought $10.2 billion of these bonds this week.

Greg Peters, Morgan Stanley credit strategist, said some of the moves may be too much, too soon.

"They have improved, and it's a real positive sign. I don't' want to discount that by any means. Investment grade indexes are much tighter, but then some of the economically sensitive stuff has really rallied," said Peters. He pointed to big moves in high yield and commercial mortgages and said they may be getting ahead of themselves.

"Given the rally, it's almost like you're pushing the probability of the success of all of these (government) plans to too high a level," he said.

Questions? Comments? marketinsider@cnbc.com

December sales reports from the nation's chain stores could send a chill through an already shaky stock market Thursday.

The monthly sales results from retailers, mostly released ahead of the opening bell, should show how the holiday shopping season wrapped up and whether there's any signs of pick up that traders are hoping for. "If it looks like nothing has changed, then this (market's) not turning around," said Art Cashin, director of floor operations at UBS.

"It looked like the consumer hit an absolute brick wall. The question is: Did that change? Was there any loosening up?" he said.

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Wednesday's stock market took a fright from the early morning release of ADP's private sector jobs data, which showed a worse-than-expected decline of 693,000 jobs in December. The data is not often indicative of the government's number, expected Friday, but ADP said it changed its methodology. Traders are now geared for a worse than expected number.

Weekly jobless claims, reported Thursday at 8:30 a.m., are expected to come in at 545,000. The market though is waiting for the big number of the week -- the December employment report. It is expected to show a loss of more than 500,000 jobs in November and unemployment at 7 percent, but economists have been raising their forecasts in recent days and now some expect losses of 600,000 and higher.

The Dow fell 245 points, or 2.7 percent Wednesday, to close at 8769. The S&P 500 fell 3 percent to 906. "I'm going to keep the caution flag up now. If we go through that (S&P ) 900 level, we'll have other things to look at," said Cashin.

T3Live.com's Scott Redler said the market looked overbought Wednesday and investors took profits after the New Year's rally. He said it would be bullish if the S&P can hold the 885 to 895 level, but if it falls below 850-860, there will be talk of a retest of the lows.

Another trader said funds and other institutions sold as stocks accelerated their decline late in the day. "Where's the Obama rally?" he said. A lot of traders have been hoping the market will hold up and gain some traction through the inauguration Jan. 20, but Wednesday's trading discouraged that view.

News of layoffs and restructuring from Alcoa and earnings warnings from Intel and Time Warner added to the negative tone. Traders fear the market will be hit by a wave of disappointing earnings and economic news at the same time investors attempt to find positives in some of the stimulus news and changes in Washington.

Obama-nomics

Investors will also continue to focus on the efforts of the incoming Obama Administration to develop a plan to battle the economic downturn and jump start financial markets. President-elect Barack Obama gives a major address at 11 a.m. Thursday on the economy and his plans.

He gave CNBC's John Harwood a sneak preview of some of those comments in an exclusive interview Wednesday.

• Watch the Full Obama Interview
• Click here for transcript of interview

Just as the market has been eyeing him carefully, Obama told CNBC he is watching the markets and understands the need to restore confidence, a commodity in low supply in Wednesday's markets. He also said he plans a major overhaul of financial markets and regulation in the next couple of months and discussed plans for a more than $775 billion stimulus package.

"Right now, given the sensitivities of the market, I've got to pay some attention to market psychology because part of what we have right now is such a loss of trust in both the marketplace and in government that restoring that confidence, restoring that trust is going to be very important," he said. Obama said he won't be watching the "crawl" at the bottom of TV screens. "What I will be doing is making sure that I'm communicating with key market participants on a regular basis, again, to explain to them what exactly our plans are and to solicit from them good ideas," he said.

He also said he would work now on curbing the ballooning budget deficit instead of waiting for the crisis to end. On Wednesday, the Congressional Budget Office pegged this year's budget deficit at $1.2 trillion, nearly triple last year's record level.

Reverse Course

As money rolled out of Treasurys and into commodities this week, some traders took it as a sign of hope that there would be more traction in the global economy this year. But Wednesday's trading in commodities markets, particularly oil, dashed that idea. "What I'm really disturbed about is what's going on in commodities," said Cashin. "It's like it was two months ago." Traders said some of those positive moves in commodities earlier this week came ahead of index rebalancing.

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Oil cratered on the Nymex Wednesday after inventory data showed larger than expected supplies, and other commodities also tumbled. Crude fell $5.95, or 12 percent lower at $42.63 a barrel in its biggest one-day drop since September, 2001.

M.F. Global's John Kilduff said the supply data was a concern but the bigger concern was the message in the ADP report. "If people don't have jobs, they don't buy $4 gasoline," he said. The build in inventories came even in the face of relatively cheap prices, a sign that demand is especially weak.

CES

The Consumer Electronics Show is in full swing in Las Vegas Thursday and will put the spotlight on new products and electronics companies.

Questions? Comments? marketinsider@cnbc.com

While stocks drift higher, the action this week has been in bonds and commodities.

Wednesday could see some of the same dynamic as traders watch for news on government stimulus plans and await the Friday jobs report. Meanwhile, the Fed has been revving up the mortgage market, pushing down rates as it buys up paper.

At the same time, the turn of the year has brought buyers back into the markets. The corporate bond market is benefiting from a wave of new issuance. For instance, GE Capital's billion dollar 30-year offer Tuesday was oversubscribed, and its Monday offer of a $10 billion FDIC guaranteed issue was well received. The secondary market for corporate bonds is benefiting from the new issuance, and spreads are narrowing.

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"You've seen some real good demand. It's probably the first step to get the credit markets moving again. In corporate and even in high yield issues, you're seeing some real mutual fund buying in that space and spreads are tightening. This is something stocks have been expecting to happen," said Robert Harrington, head of UBS equities trading desk.

"We're not going to be out of the woods yet, but I think there's enough positive things happening in the short term where stocks will win the tug of war to the upside for a bit," he said. "While you have this stimulus package being worked on, and it's viewed positively, as well as what I'm seeing in the credit markets, it might give people some more encouragement that we put in the lows in November."

The Dow Tuesday was up 62 points, or 0.69 percent at 9015. The S&P 500 rose 7 or 0.78 percent points to 934, while Nasdaq climbed 1.5 percent to 1652. the Russell 2000 was up 9.68 points or 1.9 percent at 514.

Econorama

On Wednesday, ADP's private employment report is released at 8:15 a.m. It is viewed as a preview to the government jobs report, but it is not considered an accurate indicator.

The key events though are happening in Washington. President-elect Barack Obama holds a press conference at 10:15 a.m., and he also speaks with CNBC's John Harwood in an exclusive interview during the afternoon.

The markets have been responding fairly well to talk of the giant stimulus package which has been a focus of meetings in Washington between the incoming Obama Administration and Congressional leadership this week. But the stimulus has a double edge to it. The idea it will help the economy is a positive in the stock and currency markets. But the concern that it will be too huge a program, resulting in a flood of new U.S. debt and a giant deficit, has been felt in the long end of the Treasury market.

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Commodities, meanwhile, have found some traction on the idea the plan will be inflationary. From copper to cotton, they are also moving higher as funds reshuffle holdings ahead of expected index rebalancing. Illustrating just how complicated the cross currents are in the financial markets were comments from the Fed Tuesday which said it was concerned about deflation. Those comments were issued with the minutes from its Dec. 15-16 meeting, where it also said the economic outlook will be weak for some time.

"The FOMC minutes were looking at ... no growth at all and that sent the bond market into a tizzy," said Michael Franzese, head of government trading at Standard Chartered. He said the 10-year Treasury recovered its early losses on the afternoon Fed release and returned to levels where it started the day. The yield at one point touched 2.60 but retreated to 2.505 percent by day's end.

"We're back down to a low and we're above 2.50 so that's very positive momentum," he said Tuesday afternoon. Franzese said he expects the volatility in Treasurys to continue Wednesday.

Also in Washington Wednesday, Treasury Secretary Hank Paulson speaks at 12 p.m. to the National Economists Club on the role of government sponsored entities --Fannie Mae and Freddie Mac -- in supporting the housing recovery.

Signs of Hope?

Tony Crescenzi, chief bond market strategist at Miller Tabak, has been keeping a look out for any signs of troughing in the economic downturn. He is watching a range of indicators and said Tuesday he thinks he's spotted two new ones. One that may have hit bottom is steel production, which the American Iron and Steel Institute reports increased last week for the first time in 20 weeks.

Also, despite steep declines, car sales showed signs of perking up in the final weeks of December. Crescenzi said car sales look set to increase in January as a result of government support for the industry. "For example, if car sales increase, industrial production might increase. In addition, regional manufacturing surveys and perhaps the ISM index will improve and durable good orders will improve," he wrote in a note.

Crescenzi said he plans to compile a "trough list" with an eye to identifying the depth of the recession. "The trough idea is important, as risk assets tend to gain with market participants sense a trough has been reached in part because at the trough it is easier to discern the depth and duration of the recession," he wrote.

Crescenzi said in an email that he will be also watching consumer sentiment, due out Tuesday nights. He also said it's clear mortgage applications have bottomed. Chain store sales showed some improvement in he past week, but it is too early to add retailers' sales to the list. Cresscenzi admits his list is brief and that would also suggest it may be too soon for a sustained rally in risk assets.

Oil Drill

Crude oil , which rallied early and touched $50, finished Tuesday $0.23 lower at $48.58 per barrel, ending a three-day winning streak. Heating oil led the energy complex, with a 3.2 percent increase to $1.6263 per gallon. Gasoline was up 0.6 percent at $1.1892 per gallon.

M.F. Global senior vice president John Kilduff said Russia's dispute with the Ukraine is behind the rise in heating oil prices. Russia's Gazprom has suspended delivery of gas for use by the Ukraine after the two countries failed to reach an agreement on rates. The shut off has caused shortages in Europe.

"There's going to be a greater call for heating oil globally as a result, because they're going to have to move quickly to use it for generation and heating in Europe," he said. "As luck would have it, there's a cold front moving across the continent."

Earnings Central

Several companies report earnings Wednesday, including Constellation Brands, Family Dollar Store and Monsanto, before the bell. Ruby Tuesday, Supervalu and Bed, Bath and Beyond report after the close.

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Investors are watching to see if the "January effect" turns up the heat on stocks Tuesday, after a wishy washy market day Monday.

Small caps, the usual beneficiaries in early January trading, fell slightly with the rest of the market Monday. The Russell 2000 was slightly lower, down 0.81 points at 505.03. The Dow slumped 81 points to 8952, and the S&P 500 slid 4 points to 927. The best performers were energy stocks, up 1.3 percent as crude oil gained.

The market started January on an up note Friday, with a big gain that helped push the S&P more than 7 percent higher in a six-day period. But talk is already moving to the poor shape of the economy, and specifically the market's anticipation about Friday's unemployment report for December.

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Traders have been expecting a flood of funds into stocks with the new year, but there's been much debate about whether the so-called January effect will materialize and give the market a lift.

"The only good thing about the calendar turning is that portfolio managers and money managers that have a lot cash now start at zero" with a clean slate, said Tim Smalls of Execution LLC. He expects investors with cash to put their money into big cap, quality names after last year's mega losses in the market.

"I think they will focus on the biggest and best, and then look to the hinterlands, the far reaches of the investment landscape later, after things calm down. We still don't have a clue what the stimulus proposals will look like," he said.

Smalls said the first quarter is starting off to be an extension of last year, and markets will have to get through the bad economic news in the next couple of months before it starts trading on forward expectations for a better second half. "I think what you have to look at is that everybody is expecting the economic numbers to be poor. Any surprise away from that would be welcome," said Smalls.

Econorama

Investors will be watching ISM non manufacturing data; pending home sales and factory orders, all released at 10 a.m. Tuesday. The other key economic information will come at 2 p.m. when the Fed releases the minutes of the last FOMC meeting and its forecast. At noon, the House and Senate meet to convene the 111th Congress, which should immediately begin work on the fiscal stimulus package.

Michael Darda, chief economist at MKM Partners, said he's watching the ISM non manufacturing data with an eye to the Friday jobs report. "The most important will be the ISM services employment number. That along with the jobless claims will get us pretty close to what to expect in non farm payrolls," he said.

Economists expect the unemployment rate to have reached 7 percent in December. Even President-elect Barack Obama Monday pointed to the anticipated jobs number Monday as he discussed the need for stimulus and the weak economy.

Stimulated

Investors sold longer-dated Treasurys Monday on concerns about a flood of new supply on the horizon. Talk of that major fiscal stimulus plan, with $300 billion in tax cuts, added to those fears. Also not lost on the market was the weekend Barron's cover headlined "Are Treasury Bonds Safe." The article highlighted huge issuance and low yields.

The yield on the 30-year Monday rose above 3 percent for the first time since the middle of December, and the 10-year yield climbed to 2.48 percent. Auctions this week include $16 billion in 10-year notes and $30 billion. The two-year though drew buyers, pushing its yield lower to 0.81 percent.

Opportunity?

Darda says Treasury notes and bonds, priced to yield less than 3 percent, appear to be the least attractive asset class heading into 2009.

But he said there are opportunities for investors willing to dip into other parts of the credit markets this year. "We believe municipal bonds, corporate bonds and even high yield credits stand a strong chance of outperforming the S&P 500 in 2009," he wrote. "Munis are offering tax-equivalent yields above 8 percent and would benefit from a state and local bailout package and an upward drift in the top marginal income tax rate beginning 2010."

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The S&P 500, meanwhile, has a cyclically adjusted yield of just 6.6 percent, about 160 bps below munis and corporates.

"What's nice about the corporate bond market is you could still end up the year with spreads very wide, and you could still make a killing on these investments," he said in a phone interview. Darda also said the fiscal stimulus will pump money into state and local governments.

Another opportunity in 2009 may be gold. He said gold is the most attractive commodity, but commodities may generally take a while to turn around. "I think it's going to take a while. the adjustment process is probably fairly complete and I don't know how much upside there is until the global economy gets some traction."

"Gold didn't correct down because it has more monetary components than industrial components," he said. "Gold should also benefit from the Fed's reflation efforts. If the dollar rally runs out of steam, gold would be a beneficiary of that."

Dollar Daze

The dollar, meanwhile, rose a strong 2 percent against the euro and 1.1 percent against the yen Monday. The dollar was at $1.3574 per euro, its best level in three weeks.

"I would look at this more as a day of euro weakness rather than U.S. dollar strength," said Brian Dolan, chief currency strategist at Forex.com. Dolan said the euro weakened in part on comments from two European Central Bank members suggesting a rate cut.

"It's hard to get too bullish on the dollar ahead of Friday's non farm payrolls," he said. "I think we'll see a fair amount of back and forth, and we could see the next couple of weeks at between $1.35 and $1.40 on the euro. If we get a lousy jobs report, and the dollar maintains strength and doesn't suffer very much, then that suggests there is more sustainable demand for the U.S. dollar based on the forward outlook and such weakness has been priced in."

If that's the case, he said he would become more bullish on the dollar.

"We're still in this ugly contest and it just depends who is under the spotlight at the moment in terms of which currency is going to get hit...Today it was the euro," he said.

Apple's World

Macworld, the big Apple expo, is held in San Francisco Tuesday and will put the spotlight on Apple for a second day. Apple shares rose more than 4 percent Monday after Apple CEO Steve Jobs revealed that the reason for his weight loss is a hormonal imbalance that is simple to treat. Rumors of more dire health problems have hung over the stock for several months.

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