Published: Monday, 2 Nov 2009 | 1:31 PM ET

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Wall Street has spent much of this year defying expectations, and if it continues to do so that could set up a wild end to 2009.

Photo: Oliver Quillia for CNBC.com Traders at the New York Stock Exchange.

Stocks have held up well in the normally rough months of September and October, with the Standard & Poor's 500 eking out a modest gain during a time period known as the toughest of the year.

But maintaining the market momentum during November and December, which historically have kicked off the market's friendliest six-month run, will be a stern challenge as some market pros wonder if the air is running out of a seven-month rally.

Volatility seems to be a principal watchword of the market, exemplified by Monday's trading in which the market surged shortly after the open on positive economic data but lost all its gains by lunchtime.

Jeff Cox
Staff Writer
CNBC.com

"We're going to be paying attention to the rest of earnings to see if investors are given any more reason to come into the market at these valuations," says Quincy Krosby, general market strategist at Prudential Financial. "We had a very strong liquidity-driven rally. What you're seeing now is the market is getting more selective."

The uncertainty of the market has been exemplified by the Chicago Board Options Exchange's Volatility Index

VIX loading...

Quote  |  Chart  |  News  |  Profile

[VIX  Loading...      ()   ], which has surged in recent days after threatening to fall below the important 20 level.

Earnings will continue to garner attention, but most of the big companies have already reported.

The market will be focusing as much on economic reports as well as upcoming statements from policy makers and their resulting impact on the US dollar.

Perhaps the main theme of investing since summer's end has been the negative correlation between the dollar and stocks. The greenback's successive breaking of 12-month lows has provided support beneath a stock market that otherwise might struggle to find fundamentals to substantiate such an aggressive rally.

"The fundamentals are not great and I think people know that," says Peter Miralles, president of Atlanta Wealth Consultants. "A 10 percent correction would be perfectly logical to have here. This market can't keep going straight up."

A resurgence in the dollar—possible if for no other reason than nothing can go straight down and the dollar index is at a level where support has taken hold previously—seems the only thing that could shake the market long-term. Investors who have played stocks against the falling dollar have done extremely well.

"That's been such an easy trade for so long that it's become a crowded trade," says Kathy Boyle, president of Chapin Hill Advisors in New York. "If you see an unwinding of that you'll see a selloff in gold, silver, copper, the commodities, industrial stocks. That's what we see as a potential catalyst (for the market going lower). Not that the dollar has underlying fundamental reasons for getting stronger, but it's oversold."

Still, policy makers seem intent on keeping interest rates low, which in turn weakens the dollar. No one at the Federal Reserve or Treasury is going to explicitly back a cheap US currency, but statements from this week's Federal Open Market Committee meeting are likely to reinforce the notion that there will be no measures coming aimed at propping up the dollar.

The weak dollar, combined with an earnings season that has seen beats top misses by a 4 to 1 ratio and economic numbers that show at least tepid improvement, has some thinking that a modest correction is the worst-case scenario for the markets.

For investors who have watched the market repeatedly defy predictions for a pullback, that comes as welcome news.

"The balance of the news is pretty good. Most companies are stating that the worst is behind us," says Uri Landesman, head of global growth strategist at ING Investment Management. "It's going to be slow going, but I think directionally it's going higher."

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