This is what's making the year end exciting for markets

The year-end winddown is a little bit more exciting than usual.

Oil has been the wild card for months, and it looks like it could keep a choke hold on stocks and bonds into the final hours. Despite Tuesday's gains, crude could whip up low-volume markets Wednesday, after a late-day report Tuesday from the American Petroleum Institute set oil up for more losses.

The API data showed an inventory build of 2.9 million barrels, compared to analysts' expectations for a decline. The U.S. government releases its inventory data at 10:30 a.m. ET, and it is expected to report about a 1 million barrel decline in oil inventories. West Texas Intermediate futures fell by about 1.4 percent in late electronic trading, after the API report.

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

Oil had bounced back from Monday's losses, and WTI futures settled up 2.9 percent to $37.87 per barrel, before the API report Tuesday.

Stocks charged ahead on thin volume Tuesday, and the S&P is now up nearly 1 percent year-to-date, its flattest annual performance in four years. The Dow rose 1 percent Tuesday to 17,720 but is still down a half percent for the year.

Treasurys had an interesting session, and traders will continue to watch the action there Wednesday as the government auctions $29 billion in 7-year notes at 1 p.m. ET. On Tuesday, the yield on the 2-year Treasury rose in a thin market to 1.10 percent for the first time since April, 2010.

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"I think the market is telling us two things. One is that the Fed is determined to continue the process of normalization. That's why the front end of the market keeps ending higher in terms of yield. But if you look at the auction results, there was strong demand for the 2-year sector, which suggests as yield gets higher, non-dealer sponsorship continues to increase," said Ian Lyngen, senior Treasury strategist at CRT Capital.

The 10-year yield also moved about 0.8 points to 2.31 percent in late trading.

"They certainly are in a new range. We should be grinding toward higher yields, so as time ticks on and we get close to the second rate increase and presumably the third and fourth come on the radar, it will continue to move higher. We could see 1.25 (2-year yield) very easily in January," said Lyngen.

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John Briggs, head of strategy at RBS, said he had forecast a 1.10 percent yield on the 2-year at year end. He said that besides the Fed, the move higher was in part a response to moves in the German bund and the result of Monday's 2-year note auction.

"Front end yields are pressured higher unless the Fed's projected four moves in 2016 get derailed," said Briggs.

Analysts expect the front end to move higher at a faster pace than the 10-year and 30-year part of the curve because of the Fed rate hikes. Lyngen said the long end will be more affected by data so the 10-year could backtrack on any weak reports.

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Much has been made of whether stocks will get the late-month seasonal lift of a Santa rally this year.

According to analytics firm Kensho, January actually turns out to be a better time for stocks, when the market has ended negative in the last five days of the year. In 11 such instances over the last 25 years, the S&P has been positive on average by 0.8 percent in the first week of January, and up 0.7 percent for the month. Traders believe those early days of January can determine the outcome for the month, and there's also the old saying that "so goes January, so goes the year."

When all 25 years were averaged, the S&P 500 in the first week in January has been down an average 0.1 percent, according to Kensho.

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This year, the S&P 500 was off 3 percent in January, and the year's performance, even in the final days, is still a coin toss.

Pending home sales data will be one of the final economic reports of the year, when it is released at 10 a.m. ET.