"I think we get a Santa rally. This is the most denied bull market ever. But I think people are going to come around with window dressing and the more natural process of people returning to a normal exposure to equities," said John Stoltzfus, Oppenheimer Asset Management's chief market strategist. "We think we will get a Santa rally, while it may not be one with very loud jingle bells, it should be one of good cheer."
(Read more: With jobs data on horizon, expect some selling)
The Grinch, however, could again be higher bond yields, which traders say could steal some stock market gains if interest rates rise too quickly. Stocks on Tuesday slumped, amid signs that investors are rotating holdings, putting both cyclicals and defensive names in the winners and losers categories. The defensive utility and consumer staples sectors, followed by energy and tech were the best performers, while consumer discretionary and the defensive health-care sector were losers.
The stock market hiccup also comes as traders look ahead to the end of the week, when Friday's November jobs report could provide major clues as to the course of monetary policy. If nonfarm payrolls are close to last month's 204,000 payrolls, or higher, traders expect to see a period of volatility up to the Dec. 17 and 18 Fed meeting, where it will decide whether to taper back its bond-buying program.
"I think it's healthy. Everybody is so eager to see a little bit of steam let off here that when they look at a market down 0.34 percent on the industrials, it's 'wow, we've got a pullback' but it's not really," said Stoltzfus. "From my perspective, I'll settle with moving sideways with a slightly negative bias. I do think market participants have a real desire to see some kind of catalyst that would bring this market down 4 to 6 percent. I would be careful what you wish for."
(Read more: 'Bubble' has three missing elements: Bob Doll)
Stronger data, like Monday's November ISM manufacturing report, gave a boost to speculation that the Fed could decide to taper its bond purchases at its December meeting, though most Fed watchers believe it will wait until January or March.
Stocks were also on edge Tuesday due to the move higher in interest rates, which traders say will sting stocks if they move too rapidly or edge closer to 3 percent on the 10-year note. The stock market could also put the brakes on a bond selloff, as bond buyers would be drawn in from any major shakeout in stocks. At the same time, buyers that are waiting for dips to buy stocks have been frustrated by the lack of a major selloff. The S&P is up 26 percent year-to-date.
"It's had to do with the Fed all year. Fed largesse suppressing interest rates," said Peter Boockvar, chief market analyst at the Lindsey Group. "Now the Fed hasn't tapered one dollar. ... Why yesterday, 2.80 (10-year yield) was the trigger for stocks, I don't know, but it was. We're seeing before our eyes the bond market is tapering for the Fed again."
(Read more: Gross: Fed will keep rates low until at least 2016)
Stocks suffered mild losses Monday and as of midday Tuesday, the small-cap Russell 2000 led the declines, losing more than 1.6 percent for the week so far, while the Dow was down more than 1 percent, and the Nasdaq and S&P 500 were down about a half percent. The VIX, however, was up more than 3 percent, edging close to 15. The VIX is the CBOE's volatility index, and reflects how investors are hedging in the options market. A low VIX indicates complacency, and the VIX has not been at this level since October.
December is historically the best month on average for the Dow, and it is the second-best month of the year on average for the S&P 500. In the last 10 years, the S&P was positive 80 percent of the time while the Dow was positive 70 percent. Both the Dow and S&P have been higher for eight weeks in a row.