Wall Street blowout: the start of a 'Santa Claus' rally?

Stocks soar on surprise move by six central banks and better news on US economy. Wall Street is looking for a year-end rally, although rally skeptics abound.

Richard Drew/AP
Specialists Christopher Trotta (left) and Stephen D'Agostino work on the floor of the New York Stock Exchange Wednesday, Nov. 30, 2011. The Dow Jones Industrial Average soared 490 points, its biggest gain since March 2009. Investors in December have sometimes seen a 'Santa Claus' rally on Wall Street.

Call it a blowout rally on Wall Street – maybe even the start of what has sometimes been called the "Santa Claus rally," which in some years has given investors a holiday boost to their portfolios.

On Wednesday, the widely watched Dow Jones Industrial Average soaring 490.05 points to 12,045.68, up about 4.2 percent, its best one-day gain since 2009. The big move means that many stocks are now higher than they were at the beginning of the year.

So, is this a good time to buy stocks if they are poised to rise through the end of the year? Or is this an even better time to unload them, taking advantage of the higher prices?

To answer those questions, some investors say it’s important to look at the fundamentals.

Market analysts say the main reason the market rose sharply on Wednesday was the move by six major central banks, including the Federal Reserve, to try to strengthen liquidity for European banks. The idea is to help some of these banks get supplies of dollars needed to fund their US operations and make loans. At the very least it might give banks more confidence to lend to each other, analysts said.

“You don’t fight the Federal Reserve,” says Mark Lamkin of Lamkin Wealth Management in Louisville, Ky. “And when you do, most people have lost.”

At the same time, there are some signs that the US economy might be starting to shake itself out of its lethargy. On Wednesday, ADP, the payroll management company, estimated private business added 206,000 new jobs in November. This data, combined with better than expected consumer confidence numbers on Tuesday, has prompted Joshua Shapiro, chief economist for MFR Inc., to raise his estimate for the official November jobs report to a gain of 175,000 jobs.

That's better than Wall Street’s average guess of 120,000 new jobs. The report comes out on Friday 

Nevertheless, there are still plenty of skeptics about the stock market's rally. Fred Dickson, chief investment strategist at D.A. Davidson & Co., says the Wednesday surge feels like a “relief” rally where investors are relieved that the central banks have taken a coordinated and strong stand. “Typically these rallies last two or three days,” he says.

He points out that the central banks' actions don’t solve the basic problem: Many of the countries in Europe need to borrow large amounts of money to remain solvent.

“The first test for the markets will come in late January when Italy has a whole lot of debt coming due and must refinance it,” says Mr. Dickson.

In fact, Lamkin, who has 40 percent of his assets under management in cash, does not plan to leap into the market, either.

“I am of the mind-set that I don’t want to have all the capital at work until a deal is hammered out and signed in Europe,” he says. “If a European deal does not materialize, the market is going to get hammered.”

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