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.
More From CNBC.com ...
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.
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.
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.
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."
- Video: Commodities Set For Rebound
- Tips: Dow May Hit 10,000 in 'Bear Rally'
- Contrarian: Ag Stocks Poised for 'Nice Rally'
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."
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.
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.