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.

Questions? Comments? marketinsider@cnbc.com

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.

Questions? Comments? marketinsider@cnbc.com

Wall Street hopes to continue Friday's rally into the first week of the new year after the Dow Jones Industrials closed above 9,000 for the first time in two months.

The stock market is likely to kick off the new year on an up note Friday.

Goodbye 2008, and good riddance.

Stocks could drift higher in the final session of the year Wednesday, but volume promises to remain light. There's little expectation much will happen to take away the sting of the year's near 40 percent declines.

Stock investors enter the final week of the year battered and bruised, and any bounce in the next couple of days will do little to repair tattered portfolios. But the question is now whether there will be a January effect where stocks are lifted early in the year, even if temporarily.

Friday's market promises more of the quiet drift that characterized Wednesdays' shortened session.

Traders say there could be an upswing in stocks in the next several days, before year-end, but they don't expect much volume. The Dow rose nearly 49 points Wednesday to close at 8468, and the S&P 500 finished up 4.99 points at 868.15.

Getting Technical

Scott Redler of T3Live.com, who watches the market from a technical perspective, said he is currently neutral to negative on the market based on what he sees.

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"There are big time levels to watch right now, and active traders aren't long or short right now. They are waiting to see which way the market goes," he said.

"The key level of support on the S&P is 845 to 855, but any close below 815 to 825 could ignite a move to retest the lows in the New Year," he said. "If they get us back above 880 to 890, that could put the market back in a more constructive composure that should induce new money to buy the market," he said.

The next level then would be the resistance levels of 960 to 980.

"There are a lot of people that say the last five days of the year and the first five days of the new year are indicative of what the coming year will be like. Last year was the first year in a while that we were down in December and that gave us clues," he said. "This year is a little bit of a wild card because so many people have withdrawn from the market in the last two months."

Oil Drill

Oil continues its decline and threatens to close out the year at its lows. Crude on the Nymex fell more than 9 percent in thin trading Wednesday to $35.35 per barrel on stronger than expected inventories.

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Daniel Yergin, chairman of Cambridge Energy Research sent us his thoughts on what we could see in the oil market in 2009.

"The oil market will be dominated in 2009 by the same thing that is dominating everything else—GDP and a global recession. Just as strong economic growth drove the oil market starting in 2003/2004, weak growth—or the absence of growth—will be determinant here. If it turns out that, stimuli notwithstanding, global economic growth in 2009 is only 0.2 percent or even negative, then the oil market will certainly be in CERA's "global fissure" scenario, and then prices would be in the $40 to $50 range—perhaps somewhat higher if the oil exporters show very substantial discipline.

That means budgetary turmoil for some of the oil exporters, and that the "rainy day" sovereign wealth funds will be put to work much sooner than had been expected. Investment priorities across the energy spectrum—conventional and alternatives and renewables—will be reprioritized and reprioritized again. We do see a substantial build up coming of spare oil production capacity—from just 1 million barrels per day in 2005 to 7 to 8 million barrels per day in the 2010-2012 period.

What would be the surprise? That the the biggest downturn since the Great Depression is turned around sooner than people expect by the biggest coordinated global economic stimulus program that the world has ever seen."

To Our Readers

Happy holidays! We will publish Market Insider's "Week Ahead" on Friday, and I will return Tuesday.

Questions? Comments? marketinsider@cnbc.com

Stocks are trapped in the pre-holiday doldrums and will face some tough economic data ahead of Wednesday's shortened Christmas eve session.

Consumer spending and income, durable goods and weekly jobless claims are all reported ahead of the bell, at 8:30 a.m. The data comes just after Tuesday's reports of weak home sales and the biggest decline in housing prices since the Great Depression. The stock market closes at 1 p.m. and the bond market closes at 2 p.m. Wednesday.

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On Tuesday, the Dow fell 100 points, or 1.2 percent to 8419, while the S&P 500 was down nearly 1 percent at 863.

Where's Santa?

Some traders believe it's more likely Santa will come down your chimney than come to Wall Street Wednesday. The elusive "Santa" rally has failed to materialize this week, and the market has had a quiet, but negative tone. "You see how atrocious the volume is, and it's tough getting anything started," said UBS Director of Floor Operations Art Cashin, in a phone interview.

"We were hoping Santa would get up in the air later in the day, but he can't get off the ground here," said Cashin Tuesday. "We'll see if he'll give it one more try tomorrow."

Cashin said history shows that the better timing for a Santa rally is in the days just after Christmas. Is he optimistic that will happen? "Optimism is too strong a word here," he said.

Econorama

Consumer spending is expected to be down 0.8 percent for November, and income is expected to be down 0.1 percent. Jobless claims are expected to come in at 560,000, up from 554,000. Durable goods order are expected to have a 3 percent decline in November.

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Oil and gas inventory data is reported Wednesday at 10:30 a.m. Platts says its survey shows analysts expects a 1.5 million barrel build in crude oil stocks when the U.S. Energy Information Administration and American Petroleum Institute report weekly data. Gasoline inventories are expected to rise by 900,000 barrels. On Tuesday, oil continued its decline, falling 2.3 percent to $38.98 per barrel.

Questions? Comments? marketinsider@cnbc.com

It sure feels like a holiday on Wall Street but without the merry making.

Monday's wishy washy market ended lower, with the S&P 500 falling 1.8 percent to 871. Nadaq fell 2 percent to 1532, and the Dow lost 59 points or 0.7 percent to 8519, its lowest close since December 4.

Traders said they expect more of the same low volume trading Tuesday. "I think the rest of the week is going to be kind of like this," said Peter Costa of Eckhart and Co. "It's going to be a non event week, but the risk in a non event week is the volatility could increase because the players aren't there to be on the other side."

Housing data, consumer sentiment and the final look at third quarter GDP will make headlines in an otherwise quiet market Tuesday.

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GDP is expected to come in at negative 0.6 percent, revised from its previous reading of negative 0.5 percent for the third quarter when it is reported at 8:30 a.m.. Existing home sales, reported at 10 a.m., are expected to decline 1.6 percent to 4.90 million, and new homes are expected to come in at 415,000, down 4.2 percent.

The auto industry continued to be a factor Monday, after the Bush Administration agreed to loans for General Motors and Chrysler. Credit Suisse Monday said GM's equity could be wiped out as it complies with the government restructuring targets, and it cut the target on the stock to $1. Toyota , meanwhile, showed that even the mightiest in the industry are feeling pain and it predicted a loss for the year. Standard & Poor's said it still sees bankruptcy risk for the big three even after the rescue.

Credit Un-Crunching?

Treasurys fell Monday, lifting the yield on the 10-year to 2.141 and the two-year to 0.803 percent. The Treasury saw a healthy response to its auction of $38 billion in two year notes. The yield of 0.922 was a record low, down from the last auction rate of 1.269 percent. The Treasury also sells $28 billion in five-year notes Wednesday

The credit markets continue to show signs of improvement.

MKM Partners chief economist Michael Darda pointed out in a note that the TED spread has dropped to 148 bps versus 186 a week ago and 217 bps two weeks. He also notes the two-year swap spread has dropped to 79 bps versus 103 bps a week ago and 117 bps two weeks ago. At the same time, borrowing at the Fed's discount window has dropped off.

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"While this is all good news, it's important to remember that all of these credit indicators remain far from normal and that borrowing from the Fed's window remains well above what would be seen in a relaxed environment. (effectively zero). But change takes place at the margin, and at least we've been moving in the right direction in recent weeks," he wrote.

On Friday, Darda reiterated his October call to buy corporate bonds. "... with the Federal Reserve now holding rates near zero and expanding bank reserves at a apace never seen in the history of the institution, it would seem logical to extend a bit further out on the credit risk curve," he wrote. Corporate bond yields were steady to slightly wider Monday but corporates had rallied since the Fed last week cut its interest rate target to between zero and 0.25 and said it would buy all types of securities.

Oil Drill

Oil again skidded, with the February crude contract falling 6 percent to close at $39.91 as traders worry the weakening global economy is crushing demand.

Questions? Comments? marketinsider@cnbc.com

The screeching volatility that has been the hallmark of the stock market this year may take a break for the holidays.

Traders expect thin volume in the week ahead with few players taking on major positions. Home sales, durable goods data, consumer sentiment and the final days of holiday shopping will all give new clues as to the health of the economy during the dismal fourth quarter.

"I think the majority of people have really shut down the books for the year. If there's an opportunity, they'll try to take advantage of it, but I can't see anyone doing anything of great consequence until the beginning of '09," said Tim Smalls, head of equities at Execution LLC.