Market Takes Pessimistic Turn

But at the same time, the bleak 2007 outlook from Toll Brothers suggests the much-anticipated housing bottom might still be a ways away. In addition, even as weekly jobless claims unexpectedly fell, the four-week moving average of claims rose to 328,000 Thursday, its highest level since December.

To date, the Fed has been encouraged by ongoing strength in consumer spending and sentiment despite the housing correction. That is largely a function of the fact we're still in an environment of "full employment," with the unemployment rate at 4.6%.

If, however, more layoffs are afoot and the jobless claims rate rises, the consumer undoubtedly will be crimped. The Fed, then, will be in the position of wanting to cut rates but risking its credibility as an anti-inflationary force.

In other words, the Fed will find itself between the proverbial rock and hard place. So, too, does the market find itself there heading into Friday's session, which offers nothing on the economic or earnings calendar likely to drive trading.

That being the case, Friday's session could determine whether Wednesday's prevailing optimism or Thursday's undercurrent of negativity will prove a better harbinger of the market's next phase.