New Year, Same Problem

Of course, stronger-than-expected job growth could also roil equity markets, as the belief is that the Fed will not lower rates because of fears of inflation creeping higher. The question then is how important Fed rate cuts will be to the recovery of financial and housing stocks that have been crushed under the weight of the subprime crisis.

"Down the road, some of these securities may turn out to have more value than what Wall Street thinks they do," said Mendelsohn. "If foreclosures can slow down and if banks can find a way to renegotiate some of the paper, there may be some resolution."

Most analysts are in agreement that financials will take the first step toward resolving their exposure to subprime-related losses by taking massive -- and in some cases larger-than-needed -- writedowns during the next quarter or two.

That might give the financial stocks that were battered in 2007, such as Citigroup (C Quote), Countrywide Financial (CFC Quote), Bear Sterns (BSC Quote) and Merrill Lynch (MER Quote), the ability to erase their subprime liabilities and start fresh in 2008.

Pavlik is optimistic about a quicker resolution to the credit mess, saying that "as mid-year approaches I expect the banks and brokers will have largely reduced their risk exposure to subprime investments.

"As the subprime risk is reduced, banks and brokers will resume normal lending practices," adds Pavlik.

"Whether they can back to normal lending remains to be seen," argues Mendelsohn. "It depends on how much liquidity the Fed can put out there. The Fed also doesn't want to feed an inflationary problem. Tighter standards are now falling into place, and banks are realizing past mistakes in lending. We won't go back to where we were, but it'll be somewhere in between."

As for what should have the potential to gain ground over the near term, look to what had a solid second half of 2007 -- namely technology, energy and mining.

"Looking out to 2008, or at least the first quarter or two, we are not seeing a shift in the leadership, technical indicators or any fundamentals to suggest that the broader trading ranges will be broken," says Marc Pado, U.S. market strategist with Cantor Fitzgerald.

"Technology has worked well in the fourth quarter, so I would expect that in the first quarter," said Mendelsohn. "Energy has also remained strong. It looks like [crude oil] prices are going to $100 a barrel."