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.
Traders expect more money to be put back to work as investors tentatively shop for bargains in a market nearly 40 percent below the level it was at last year.
For the holiday-shortened week, the Dow gained more than 500 points, or 6.1 percent, snapping a four-week losing streak. The S&P had the best weekly performance, up 6.76%, while the Nasdaq rose almost as much.
In the coming year, markets need to see hope convert to confidence in order to sustain gains, and that will not be easy with an economy still seeking bottom.
The data calendar in the week ahead is expected to be another bleak look at a very poor fourth quarter. December employment on Friday is the big number to watch.
Auto sales are reported Monday, and chain stores will release December sales on Thursday. Minutes from the Fed's last meeting will shed light on the Fed's view of the recession and outlook.
"None of the major economic data have shown signs of a trough," said Miller Tabak's Tony Crescenzi. "I think for equities to improve, the economy has to stop showing signs of getting worse." He expects the unemployment rate to rise to 7 percent in December, and the decline in non farm payrolls should be between 400,000 and 500,000.
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Rescuing the economy will be a big topic in Washington in the coming week. The new Congress is sworn in Tuesday and gets to work Wednesday on a new fiscal stimulus package.
Technology stocks may also be in the spotlight with two big events in the coming week. Mac World is Monday and Tuesday though Apple CEO Steve Jobs will not attend. The Consumer Electronics Show, where the industry show cases its latest gadgets, begins Wednesday night in Las Vegas and runs through the weekend.
The stock market could benefit in the coming week from "January effect." Traders have been encouraged by the decline in the Chicago Board of Options Exchange's Volatitliy Index, which has pulled back from record highs.
"It's like all the players are suffering from post traumatic stress syndrome," said James Paulsen, chief investment strategist at Wells Capital Management.
"There's just this overwhelming impression that even if it gets better in '09, it's going to be a slow and arduous process." Paulsen said if history is a guide, the market's recovery from its depression era-like decline may not be as weak as some expect.
"I looked at all of the panics since 1900 that were of this size—40 percent declines or more. There's been six of them...One of them of course was the Great Depression. It went down this much and went down this much again," he said.
But as for the others, the market came back in the following year. "In five of the six panics of this magnitude, not only are they similar to what we experienced, but all of them recovered their losses within 18 months," he said.
Paulsen said he thinks the market is more likely to follow a course similar to the periods after the rich man's panic in 1903, the panic of 1907 or the panicked collapse of the "nifty 50" blue chips in 1973/74 than the 90 percent decline of the Great Depression.
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"I'm going to go with a big move rather than a small move. I think something that falls this hard, this fast, recovers fast. I don't know if it will be next year, but I'm guessing it will be. The economy is free falling, but it's already being discounted," he said.
Paulson expects the S&P 500 to reach 1200 to 1250 by the end of 2009. Paulsen said he favors beaten up industrials, technology, and consumer cyclicals.
"If you're a risk asset - a cyclical stock, an investment grade bond or junk bond; a commodity -- what is there not to like? The stuff that scares me most is the safe haven stuff.
Do you really sleep well at night and have a Treasury bill paying you zero?" he said.
Many economists believe the third quarter will be a turning point for the economy. Paulsen said he thinks there will be a "V" recovery. "We're collapsing because of healthy players frozen by fear. The good news is because they're really healthy players, that if you just improve confidence, they could be a big factor by the second half. We're talking about a trillion dollar fiscal package next year," he said.
"..If that happens, I think there's more a V than not in the economy...I think the stock market has a bit of a V itself." Econorama There's a full calendar of economic news in the week ahead.
On Monday, construction spending is reported. ISM non manufacturing data, pending home sales and factory orders are reported Tuesday.
The Fed's minutes are released Tuesday afternoon. ADP's private sector employment report is released Wednesday morning, ahead of the government employment report Friday.
Weekly jobless claims are issued Thursday as usual. Consumer credit is reported Thursday afternoon, and wholesale trade for November is reported Friday.
Some interesting commentary may come from the American Economic Association annual meeting this weekend and Monday. The San Francisco event is expected to be attended by hundreds of economists, including a number of Fed officials.
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The House Financial Services Committee holds a hearing Monday on the Madoff fraud.