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Market Outlook: Stock Rally May Continue to Year-End

Investors are believing in the Santa Claus rally again.

After another strong week in stocks, many think the markets will continue rising for the rest of the year. After Jan. 1, however, the outlook becomes decidely more mixed.

The Dow Jones Industrial Average closed at another record on Friday, leaving the average up 1.1% for the week.

The Nasdaq finished up slightly, leaving it up 0.81% for the week. The S&P 500 posted a modest gain, but still enough to be up 1.2% for the week and set a fresh six-year high.

The Friday rally was fueled by several factors, including better-than-expected news about consumer inflation and industrial production. Many think the buying will continue into next week.

Positive Next Week

"The week after options expiration (on Friday) is really when the Santa Claus rally begins," Jeff deGraff, Chief Technical Analyst at Lehman Brothers, told CNBC's "Closing Bell. "It's a little bit more pronounced on the Nasdaq than it is on the S&P, but still historically, you can expect a positive week next week."

Tuesday's report on producer prices will be closely watched for further confirmation that inflation is in check.

"I think the markets will probably hover around current levels, but investors will be focused on wholesale inflation as measured in the PPI report," John Lynch, Chief Market Analyst at Evergreen Investments, told cnbc.com. "If we continue to see further reductions in the energy and materials components, that all bodes well for future inflation."

Even though the Dow is up 16% year-to-date, the S&P 500 higher by 14% and the Nasdaq up 11%, many analysts remain upbeat about the prospects for stocks going into 2007.

"I think the stock market is basically telling you the Goldilocks scenario for the economy is the most likely one," Jason Trennert, Chief Investment Strategist at Strategas Research Partners told cnbc.com. "You're going to get strong economic growth and benign inflation and most likely the Fed out of the way going into next year."

End of the Rally?

Others, however, see the rally running out of steam soon.

"I think we're just about at the end of the rally from July and the market is getting itself up for a pretty decent reversal, whether it comes next week or toward the end of the year," Steve Hochberg, Chief Market Strategist at Elliot Wave International told cnbc.com.

"In the next three to six months, the risk of volatility is high, I believe, because people are misgauging what the Fed is saying," said Richard Bernstein, Chief Investment Strategist at Merrill Lynch in an exclusive interview on cnbc.com. "I think there's a lot of people believing the Fed is going to ease imminently and I'm not so sure that's in the cards. In the first half of 2006, we had volatility in the market because people felt Fed policy was uncertain and we could replay that in 2007."

Nine Dow stocks hit 52-week highs during Friday's session including General Electric ,the parent company of CNBC, Microsoft and American Express.

Sectors across the board picked up gains. Dow leaders included Honeywell , Boeing and Proctor & Gamble.

The Nasdaq got a lift from shares of Adobe Systems after the software maker reported higher profits on Thursday and gave a first-quarter outlook in line with Wall Street expectations.

Cisco Systems hit a new high after the networking equipment maker said it will acquire Tivella Inc., a private digital signage software company.

Oil prices rose above $63 a barrel on concerns about attacks on oil facilities in Nigeria. Crude oil extended gains made Thursday after OPEC decided to cut oil production by 500,000 barrels a day beginning in February.

In the currency market, the U.S. dollar rose against the euro, yen and the British pound.

Europe, Asia Close the Week Higher

In Europe, London's FTSE-100 , Frankfurt's DAX and Paris' CAC-40all closed higher. The FTSE CNBC Global 300 index was also higher.

The Nikkei 225 Average rose to its highest level in seven months as the Bank of Japan's tankan survey showed business sentiment hitting a two-year high in December. South Korea's Kospi Index also closed higher.

Australian shares closed little changed after retreating from an early record, which some believe will be surpassed by the calendar year's end.

Hong Kong's Hang Seng Index received a boost on the good performance of three IPOs that debuted on the market Friday. Singapore's Straits Times Index closed higher, lifted by positive employment data.

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