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Housing figures next week may inject a dose of sobriety into these forecasts. Anticipation of a strong expansion, coupled with worries about the budget deficit following a new tax deal in Washington, have pushed Treasury bond yields that directly affect mortgage rates sharply higher.

This raises the concern that a still-struggling housing sector, the epicenter of the country's worst financial crisis in generations, may yet see further deterioration.

With Europe still reeling from a debt crisis that just will not go away, another bump on the road for the U.S. economy might deprive the global recovery of not one but two key engines.

A report on Wednesday is expected to show existing U.S. home sales, which account for the bulk of the market, rose by about 300,000 units on an annualized basis to 4.71 million in November. That would mark a move further away from the 15-year low seen in the summer, but it would still be a far cry from record peaks over 7 million in 2005.

"We're still in an economy that isn't in a normal recovery mode," said Edward Leamer, director of Anderson Forecast at the University of California, Los Angeles. "Unless we get housing and construction jobs back, we will not get a robust recovery. We will be stuck with high unemployment rates indefinitely."

That view contrasts with the burst of optimism prevailing in financial markets over the last month. Some economists, encouraged by what they see as the stimulative effects of a fiscal agreement between President Barack Obama and Republican lawmakers, are looking for U.S. gross domestic product to expand more than 4 percent next year.

For others, however, a battered housing market and bleak job prospects are a major risk to the recovery.

"The U.S. economy is showing some sparks of life in late 2010," said Ken Goldstein, an economist at The Conference Board, an industry-backed research group. "The indicators point to a mild pickup after a slow winter. Looking further out, possible clouds on the medium-term horizon include weakness in housing and employment."

A Reuters poll of more than 70 economists suggests U.S. GDP will rise 2.7 percent in 2011, up sharply from 2.3 percent in a November poll but still too low a level to make much headway in reducing the nation's 9.8 percent jobless rate.

EUROPE'S MORASS

Looming in the backdrop is a European debt debacle that seems to get more convoluted by the week.

Just two days after Ireland's parliament approved an $85 billion rescue from the European Union and the International Monetary Fund, the IMF warned the country still faces big risks that could affect its ability to repay the loan. Moody's, the ratings agency, slashed Dublin's credit grade and European banks warned of future losses on Irish assets.

Investors' concern about the credit-worthiness of highly indebted euro zone countries will make it hard for some states to finance hefty debt repayments in the first half of 2011, even as new issuance in the bloc falls.

Euro zone countries are expected to borrow less in the bond markets in 2011 than they did this year, but the interest rates investors are demanding pose a burden that may become unsustainable for the likes of Spain and Portugal.

Unlike in the spring, when Europe's problems disrupted interbank lending and dented U.S. growth, such effects have not been felt in the latest, more drawn-out round of debt negotiations. But analysts say the threat remains very real.

(Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler)

One of the defining characteristics of 2010 has been the strong correlation across asset classes. Movements in the dollar or in bonds had just as much impact on equities as more fundamental factors, such as corporate outlooks.

The tight relationships came as investors focused on the same factors -- further stimulus from the Federal Reserve, sovereign debt worries in the euro zone and the strength of the economic recovery.

The macro focus has meant investors made the same trades rather than differentiating individual sectors and industries.

"No matter how much work you put in trying to pick winners and losers, the profit available from doing so was way below normal," said Charlie Blood, director of financial markets strategy at Brown Brothers Harriman in New York.

Analysts expect that correlation to ease in the coming year, allowing sectors to see more divergence and affording investors more chances to outperform the market.

"It's structurally just unsustainable to have that kind of (correlation) because it doesn't allow for diversification," said Nicholas Colas, chief market strategist at the ConvergEx Group in New York.

"I do think it has to reverse -- it's just not a healthy part of the capital market," he said.

Even as investors reposition themselves, the broad market is likely to drift until year-end with next week shortened by the Christmas holiday.

Indeed, Wall Street's fear gauge, the CBOE Volatility index, or VIX .VIX, on Friday fell to its lowest level since April.

Investors will also take in a round of economic data next week, including the final reading of gross domestic product for the third quarter, new and existing home sales for November and December consumer sentiment.

TOO HOT TO HANDLE

Stocks that have been the best performers for the year are already seeing a pullback, suggesting investors are happy to lock in profits as they search for fresh opportunities.

Salesforce.com (CRM.N), one of the best-performing stocks on the S&P 500 this year, has backed off this week, sliding 8.1 percent. Even so, the stock is up 85 percent for the year.

Mid-cap Netflix (NFLX.O), another investor favorite this year, has shed 12.6 percent since the beginning of December, though that still leaves the stock up some 226 percent this year.

Some stores will offer 24-hour shopping or help you make sure the item you want is in the store before you even get into the car. Others are trying to rectify early missteps.

Best Buy Co Inc (BBY.N) made a bad merchandise bet and watched sales fall as shoppers looked past pricey 3D and Internet television technologies this year.

But the electronics chain may be an outlier in an otherwise improved shopping season, with the National Retail Federation raising its holiday sales forecast this week.

Reuters is monitoring the holiday strategies of department store chain J.C. Penney Co Inc (JCP.N), discounter Target Corp (TGT.N), Kmart parent Sears Holdings Corp (SHLD.O), Best Buy and Toys R Us.

A sixth company that Reuters had been following, teen apparel chain Aeropostale Inc (ARO.N), had a different change of heart, based on a media report that it is setting up a defense against a potential takeover bid.

Aeropostale has not commented on the report and did not respond to repeated requests for an update on its holiday strategy this week.

BEST BUY:

Best Buy lost tech shoppers to mass merchants like Target and online retailer Amazon.com (AMZN.O) as it discounted less and promoted expensive 3D televisions this season.

The retailer acknowledged its misstep on Tuesday, when it reported a drop in quarterly sales at existing stores and lower-than-expected earnings.

After realizing that "the consumer is definitely showing propensity at the low end," the retailer said it will now promote lower-priced 32-inch TVs and making price adjustments in its computer section.

"The U.S. consumer is carefully considering his or her wallet and what they are going to buy for their holiday gift-giving," Dunn told Reuters in an interview, adding he expects sales volumes to be "enormous" in the 10 days before and after Christmas.

To boost customer traffic, Best Buy will offer free smartphones every day for the remainder of the holiday season. Customers will still need to sign the 2-year service agreement to get the phone.

TARGET:

Troy Risch, executive vice president of stores, said the company brought more televisions into stores to shore up dwindling stocks of what have been a popular item this season. But it is not overstocked with other goods.

The Conference Board's measure of leading economic indicators jumped 1.1 percent in November, the biggest rise since March and the fifth straight monthly gain.

The increase in the LEI matched forecasts in a Reuters poll. The index's level is now at a record high of 112.4, the research group said.

It was the latest evidence of steady, if fragile, improvement in the country's growth prospects after a summer lull. Retail sales in particular have been surprisingly strong, raising hopes for consumer spending.

"The U.S. economy is showing some sparks of life in late 2010," said Ken Goldstein, an economist at The Conference Board. "The indicators point to a mild pickup after a slow winter. Looking further out, possible clouds on the medium term horizon include weakness in housing and employment.

U.S. gross domestic product grew at a 2.5 percent annual rate in the third quarter, but that was not enough to bring down the jobless rate, which rose to 9.8 percent in November.

(Reporting by Pedro Nicolaci da Costa; Editing by Neil Stempleman)