Hangover or after-party for stocks?

A bout of profit taking seems likely early in the new year after the S&P 500 ended its best December in almost two decades, but stocks may have further to run at the start of 2011.

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.