While stocks have improved from their late-November lows, the economy has continued to worsen, and experts say it's tough to predict how much of the negativity is priced into the market.

But savvy investors may be able to come out ahead next week by burrowing deep within troubling economic data to gain insight on how long the downturn will last and which companies stand to be the winners and losers of the recession that began one year ago.

Abysmal employment reports have been unveiled in the past couple of weeks, showing surging unemployment and spiking jobless claims. On top of that, Bank of America ( BAC) announced major layoffs, while companies like Sara Lee ( SLE) and Stanley Works ( SWK) revealed smaller cuts and Yahoo! ( YHOO) started implementing previously announced layoffs.

On Friday, the Labor Department reported that the producer price index, which tracks the cost of goods before they reach consumers, fell 2.2% in November, a continuation of deflationary trends that started to take shape in the fall. The decline was a bit more than the 2% drop economists had expected. Meanwhile, a trade report indicated that consumer cutbacks and the slowing global economy have hurt shipments of goods from both the U.S. and abroad.

Next week has two major events on the economic calendar that stand to drive the market, both of which fall on Tuesday: The change in consumer prices last month and the Federal Reserve's policy statement.

The market expects price declines to have trickled down to consumers, with predictions that the consumer price index dropped 1.3% in November and that core prices rose a mere 0.1%. The futures market is also betting that the Fed will slash its key interest-rate target by half a percentage point in an effort to stimulate the slumping economy.

Doug Roberts, chief investment strategist of ChannelCapitalResearch.com, says the Fed meeting next week will be "extremely important," overshadowed only by CPI.

"Investors will be looking at the core number. Is it falling out of bed, indicating a massive deflation?" says Roberts. "What really affects the market now are the outliers, because right now everyone is pessimistic."

Despite the bleak economic reports and overwhelming pessimism, the Dow Jones Industrial Average wavered from a high of 9151.61 on Monday to a low of 8347.81 on Friday as investors weighed the significance of various reports and continued to await word on whether Washington would bail out Detroit automakers GM ( GM), Ford ( F) and Chrysler.

The Dow ended the week at 8629.68, essentially flat for the five sessions, but still up 17% from the 52-week low of 7392.27 set Nov. 21.

Harry Rady, CEO and portfolio manager for Rady Asset Management, says that owing to the volatility of what he calls a "manic-depressive" market, any rallies in the near term will be short-lived. Rady says tax-loss selling will keep values down through the end of 2008, and that the system still has massive deleveraging ahead that may take years to work through.

"I'm very bearish," says Rady. "I think the rally that we had last week was simply a bear-market rally and that there's a lot more downside. That's a downside on the Dow to at least 7000, and upside to 9000. I'm a buyer on 7000 and a seller on 9000."

Rady has been seeking bargains in the natural-gas and agricultural space on what he considers overextended selloffs. Brian Dolan, chief currency strategist at Forex.com, notes that while the broad investor base has started to dip its toes back into equities in a similar fashion, the market is still risk-averse. He says investors are not just considering headline figures, but delving into economic data to gain clarity on how long it will take for a rebound.

"What they're looking at more closely is how far is growth pulling back, how fast is consumer spending contracting, how is sentiment doing?" says Nolan. "I think that is what's driving the environment here. What the market is focusing on really is the risk of deflation, and that is why people are buying Treasurys with negative yields."

Indeed, while the Dow flirted with improvement, yields on short-term T-bills turned negative last week as investors placed a premium on safety over potential returns in riskier assets. Greg Womack, president of Womack Investment Advisers, says fears about deflation make slightly negative or nonexistent returns even more attractive. In effect, investors don't mind simply keeping the money they have or losing just a little if prices are decelerating faster than their losses.

"If it really comes down to where CPI is falling through the floor, there may be some concern," says Womack, "but the market is really anticipating more deflationary indicators, at least in the near term. Investors are chasing not so much the return, but the safe money."

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