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Technical indicators are pointing to a strained market, though recently stocks have been maintaining the momentum of late 2010.

The potential is certainly there for shares to derail this week with some important economic reports due. A repeat of last month's disappointing U.S. jobs number could spark a sell-off.

"We think in the near term markets are getting ahead of themselves," said Zahid Siddique, a portfolio manager for Gabelli Equity Trust in Rye, New York. "The data has to be good for the markets to continue to go up, and if there is any weakness in the data, we think we could have a sell-off."

Analysts in a Reuters poll expect the economy added 126,000 jobs in December, up from 39,000 the prior month, but still not enough to significantly dent unemployment.

A series of global purchasing managers indexes are also due this week, including the Institute for Supply Management's two monthly surveys. They are expected to show growth quickened in December in the U.S. services and manufacturing sectors.

An array of technical factors show the market may be at the top end of its recent trading range, but strongly trending markets often produce false signals.

"There is no denying the fact that the market is overbought," said Paul Hickey, an analyst at Bespoke Investment Group in Harrison, New York. "The entire month of December the S&P 500 has closed in overbought levels everyday."

Hickey considers the S&P 500 overbought when it moves one standard deviation above its 50-day moving average. But looking at prior months where that has occurred, he found performance the next month was above average instead of reverting to the mean.

"Momentum tends to carry the market further," he said.

BEST S&P DECEMBER SINCE 1991

Signs of an improving economy, tax breaks and loose monetary policy helped spur a near 20-percent rally in the S&P 500 since the end of August. The index rose 6.5 percent in the last month of the year -- its best December since 1991.

The gains stalled in the last week of the year with indexes finishing essentially flat.

Siddique, who helps manage a $1.3 billion equity fund, says his firm raised cash as equities rose by paring positions in strong performing consumer discretionary and industrial sectors.

He said worries over Europe's sovereign debt crisis, global growth and political tensions may resurface. He is looking at defensive sectors such as utilities, consumer staples and healthcare, which have lagged.