Pfizer

(PFE) - Get Report

didn't play its usual safe, defensive role in the stock market Monday. Instead, the pharmaceutical company's stock was the blood-red splotch on mostly green trading screens across Wall Street.

Pfizer's shares fell 10.6% on news the

company halted research on its cholesterol drug torcetrapib, a move that sparked several analyst downgrades. Nevertheless, the

S&P 500

closed at a new high for the year, up 0.9% to 1409.12. The

Dow Jones Industrial Average

gained 0.7% to close at 12,283.85, with all of its components gaining ground, save Pfizer and

Merck

(MRK) - Get Report

, which slid 0.8%. The

Nasdaq Composite

was up 1.5% to close at 2448.39 Monday.

Without any economic data Monday, the markets gravitated to their instinctive paths -- up for stocks, down for bond yields. The stock market shrugged off last week's dollar woes as another swath of merger and acquisition activity sparked buying once again.

The biggest deal was in the financial sector, where

Bank of New York

(BK) - Get Report

and

Mellon Financial

( MEL) agreed to a $16.5 billion stock-swap merger, which sent the two financial companies' shares up 11.7% and 6.5%.

Other securities processing and custodial banks rose in sympathy, and

speculation of more consolidation, with

Northern Trust

(NTRS) - Get Report

up 3.5% and

State Street

(STT) - Get Report

higher by 5%.

Also, chipmaker

LSI Logic

(LSI) - Get Report

is acquiring

Agere

(AGR) - Get Report

for $4 billion in stock. LSI's shares fell 13.6%, while Agere's gained 8.4%.

Lastly,

Station Casinos

(STN) - Get Report

agreed to an $82 per share buyout offer from CEO Frank Fertitta and private equity firm Colony Capital. Station's shares soared 21.7%.

Hearts and Minds

Late last week stock traders were getting on board with the pessimistic note coming from the bond market. But on Monday, they took solace from a breather in the dollar's decline and from weakness in oil, which dropped Monday after surging last week. January oil futures fell 1.6% to close at $62.44 per barrel.

Chicago Fed President Michael Moskow was in the news again Monday, reiterating in a

CNBC

interview his message that the economy is strong and that inflation remains uncomfortably high.

But the bond market continued to ignore the

Fed's

rate hike and inflation concerns, going instead on their chosen path, arguably foretelling recession. Yields slipped only marginally Monday, as traders brace for the Institute of Supply Management's read on the service sector Tuesday. It was the soft ISM manufacturing survey Friday that sent stocks plunging and bonds rallying to 11 month highs. On Monday, the 10-year and 30-year bonds rallied 2/32 to yield 4.43% and 4.54%, respectively.

"There is a fight for the heart and soul of the bond market," says William Hornbarger, fixed-income analyst at AG Edwards. "Is it the Fed or the data?"

Hornbarger believes the bond market is overbought, but that the Fed's hawkish talk is hackneyed at this point and "traders are more concerned about the economy and growth."

The Fed may be jawboning about inflation, but rising oil and commodities prices could be a danger for stocks, bonds and the economy if they resume their upward moves after Monday's breather.

"The price of oil over the past two weeks has firmed up, and it is flirting with $63 per barrel," says Art Hogan, chief market analyst at Jefferies & Co. "This is a negative catalyst for the market."

From a technical perspective, there are reasons to believe oil prices could continue to go up. Open interest expanded last week in futures trading as oil climbed $3.51 per barrel. Also, bullish consensus in the oil futures market hit a two-year low in the first week of November, a contrarian signal of an upturn to come. Other commodities also are rising. Gold gained 1% last week as the dollar fell, and the Journal of Commerce industrial metals index neared its all-time high, as the Reuters/Jefferies CRB Index hit a new all-time high.

"Wage gains may continue for a while, and further upside to commodity prices will not help the case for lower interest rates," wrote Thomas McManus, chief U.S. equities strategist at Banc of America Securities, who further noted that "strong metals prices have historically been a problem for stocks and may interfere with current P/E multiple valuations for stocks."

Mary Ann Bartels, chief market analyst at Merrill Lynch, agrees the commodity bull market is still in effect. Crude and gold "underwent a cyclical correction and are breaking out," she wrote in her weekly report. Bartels believes energy stocks have more room to rally as seasonal trends say energy stocks rally during the winter months, and investors may chase the sector to window-dress their year-end performance.

The stock market is discounting the oil-price trend and the energy rally, as

Exxon Mobil

(XOM) - Get Report

and

Chevron

(CVX) - Get Report

marked new all-time highs again Monday.

So, while the markets watch the data, evidence of the biggest threat to low interest rates and the bullish stock market might be a revival of the speculative commodities trade.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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