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Market Insider: The Week Ahead

The screeching volatility that has been the hallmark of the stock market this year may take a break for the holidays.

Traders expect thin volume in the week ahead with few players taking on major positions. Home sales, durable goods data, consumer sentiment and the final days of holiday shopping will all give new clues as to the health of the economy during the dismal fourth quarter.

"I think the majority of people have really shut down the books for the year. If there's an opportunity, they'll try to take advantage of it, but I can't see anyone doing anything of great consequence until the beginning of '09," said Tim Smalls, head of equities at Execution LLC.

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Richard Drew

Stocks chugged higher in the past week, with the broader indexes edging out slight gains. The S&P 500 was up 0.89 percent at 887.60, and the Nasdaq gained 1.5 percent to 1564. But the Dow lost 50 points, or 0.6 percent to end at 8579. The Bush Administration's announcement that it would provide loans to General Motors and Chrysler eased investor concerns about a snowballing bankruptcy in the auto industry.

The big action though was in other markets. Treasury yields touched near record lows; the dollar swung lower in wild trading, and oil prices tumbled to an almost five-year low. Gold, meanwhile, found buyers in a week of uncertainties, gaining 2 percent to $837 per troy ounce.

Whither Stocks?

Citigroup U.S. equities strategist Tobias Levkovich said as 2008 exits, investors are not making major investment decisions but early in the year there could be some money flowing into stocks because of the changes in Washington. "I suspect with the Obama inauguration there's going to be some excitement going into it," he said.

"I think the President-elect has been pretty open and fair to play down the expectations for a big bounce in the economy just because he's sitting in the White House," Levkovich said.

He said stocks benefited from leaks on the stimulus package which is expected to be put forth, once President-elect Barack Obama takes office. But he said the package will not generate real growth. "It mitigates the pain. The economy could be down much worse if you didn't have a stimulus program. To suggest the stimulus is growth is a misinterpretation," he said.

Separately, Citi analyst Brian Chin said in a note that some infrastructure related stocks, like Fluor, were overvalued by "Obama-mania." He said the stocks would see a less than 5 percent earnings improvement from the stimulus over two years, but the stocks have risen 75 percent in a month.

Levkovich also notes the market reacted to the idea of a huge infrastructure play, but the spending on infrastructure will be relatively small compared to what is spent over the anticipated two-year period. "$100 billion is probably going into Medicare and Medicaid. $100 billion could be going into low and middle income tax cuts. None of that is going to be spent on infrastructure. The numbers are probably in he $350 billion a year range. The money is also going into food stamps, unemployment programs, alternative energy. Then there's going to be some of it going into infrastructure for things like roads and bridges," he said.

Levkovich said he expects stocks to end 2009 higher but not much. He has a target of 1,000 on the S&P 500 for year end 2009. "You could have rallies above that," he said. He likened the current environment to other periods when the economy was under stress but there were still opportunities in the stock market.

He pointed though to the 1930s and 1970s. "Once we hit bottom, from 1932 to 1940, still in the Great Depression, there were five major trading rallies. The average gain was 92.8 percent. So even in the Great Depression, you could have made a lot of money trading stocks," he said.

In the 1970s, there was a similar story. "From the 1974 bottom to 1982, the beginning of the great bull market, you had six trading rallies and you're average gains were 32.5 percent," he said.

Levkovich said Citi has a "panic/euphoria" model which examines what investors are doing in their portfolios. He said that model went into "panic" mode a week ago. "When it's in panic, there's a 97 percent probability the market will be up a year later," he said. The model is built around 9 different factors, that include such things as margin debt and short selling. The five-year-old model has been tested on weekly data going back 20 years.

The stock sectors he currently likes now are diversified financials, insurance, and select retailers. "The good news for them (retailers) right now is expectations are pretty lousy," he said.

Economic Calendar, Currencies Craziness and Oil

Econorama

Housing data is released Tuesday with both existing and new home sales, reported at 10 a.m. Consumer sentiment is also released that day as is the final read on third quarter GDP. On Wednesday, durable goods data is released as is personal income and weekly jobless claims.

"Our sense is that existing home sales are probably holding up better than one might have expected. There's been a big move in prices," said Stephen Stanley, chief economist at RBS Greenwich Capital. But he said the new home sales could be worse.

"Builders don't have quite as much flexibility on price," he said. "The key thing at this s point is obviously we have this tremendous inventory overhang..I think it's good to see big drops in construction because obviously the more that's going on the the more of an inventory problem we'll have down the line."

"We've gotten to such low levels in housing starts that that number could bottom in the next three or four months..In general, you're looking at maybe next spring for home sales to bottom if the credit situation starts to improve," he said.

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In the past two weeks, mortgage rates offered from some institutions have fallen significantly, to levels not seen in 50 years as the Fed participates in he market. But Stanley said that movement is not going to cause much change in the housing market as yet. "If you believe the mortgage application data.. It looks like it's doing much more on the refinancing side than on the purchase side. That's not all that surprising," he said.

Stanley said the other important data in the coming week is the durable goods data and the personal income and spending data Wednesday.

Currency Craziness

The dollar lost nearly 4 percent against the euro in the past week and 2 percent against the yen in a week of high volatility.

"We'll probably have a very short reflex rally in the euro," said Boris Schlossberg, director of currency research at GFT Forex.

The dollar tumbled after the Fed cut rates to a range of zero to 0.25 percent and announced a series of aggressive moves to help the economy. Then the European Central Bank Thursday said it would lower deposit rates, reversing the move. "The primary driver of the long euro trade was yield. By taking away the incentive, that took the euro from $1.47 to $1.38 in two days," said Schlossberg.

"You could attribute the volatility to illiquidity, which is probably a large percentage of why we are having such large moves. But I think underlying it is a very worrying trend. I think there's a lot of uncertainty in the market about direction of the global economy. This kind of volatility tells me we have some very troubling months ahead," said Schlossberg.

Traders say currency trading could be quieter over the holiday period as many traders are heading for vacations. For the dollar, the next big economic news is the December employment report on Jan. 9.

Oil Drill

Crude oil in the past week fell 26 .8 percent to $33.87 per barrel, the largest decline since January, 1991. The January crude contract on NYMEX expired Friday, and the February contract is at a level of $42.50. So on Monday, crude's front contract will be trading in the low $40s. John Kilduff, senior vice president at M.F. Global, says he thinks crude will stay in the $40s and that the drop in January's contract was the result of a combination of trends. "I think it represents to a large degree the liquidation by hedge funds because of all the redemptions that came in," said Kilduff.

He also said some of the selling has to do with a lack of storage capacity at the industry's delivery point in Oklahoma, and as a result, traders were forced to sell as the January contract expired.

Questions? Comments? marketinsider@cnbc.com