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Has the Santa Rally Already Begun?

Merry Christmas, markets.

This might be the Santa rally you were hoping for, but it may be fleeting.

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Coordinated central bank action and strong U.S. data combined to spark a powerful rally that some analysts say might just be the start of a seasonal year-end rally. But they also warn the rally could quickly fade on fresh bad news from Europe, and it is not likely to stretch into the new year.

"This is a tough market," said Randy Frederick, director of trading and derivatives of Charles Schwab . "No matter what you do, you can't do anything and expect it to last a while."

Still, he added: "All we needed for a Santa rally was something to put off this problem until next year, and this could be the beginning of that."

Other pros are equally skeptical.

"I'm hoping! I'm flipping a coin," said James Paulsen, chief investment strategist for Wells Capital Management.

The stock rally pushed the Dow back into positive territory for the year. The S&P 500 was up about 3.5 percent, breaching the important 1230 range.

"This could go 15 percent," said Dan Greenhaus, chief global strategist with BTIG. "These days it's impossible to say what's going to happen...People are looking for a year-end rally, and the combination of good economic data and central bank support could be the impetus."

Credit spreads narrowed, and investors dumped Treasurys, sending the 10-year yield as high as 2.10 percent. The euro jumped more than a percent and was trading as high as 1.35. Commodities prices were higher across the board, with oil up nearly a percent, over $100 per barrel, copper up nearly 6 percent, and gold rallying nearly 2 percent.

The markets euphoric reaction follows a move by the Fed and five other major central banks to ease some of the strains in the financial system and make dollar loans more available, particularly to European banks.

As of next Monday, the central banks are lowering the cost of existing dollar swap loans, or temporary loans to banks, by a half percent and they will extend the program to February, 2013 from August, 2013.

"It does feel a bit like 2008, where you had any number of announcements that led to a rally that eventually was faded," said Greenhaus. "The central banks announcement today was aimed at the demand for dollars and making them cheaper. It does nothing to solve the problems that caused the funding pressures."

The early morning announcement from central banks followed a move by China, which eased reserve requirements for its banks in order to spur economic activity.

"I'm not as worked up about Europe as I am about an emerging world recession. We finally got China to ease, and I think that is the best news of the day," said Paulsen.

On top of the easing, U.S. economic reports—the ADP private payroll report, Chicago PMI and pending home sales—were all stronger than expected Wednesday morning. The ADP report showed 206,000 private sector jobs were added in November, stirring optimism about Friday's government jobs report.

"I think the most important thing for investors is to stay focused on what's happening here," Paulsen. "The fundamentals of the United States are just coming along better than anybody thought. Ultimately that's going to be what determines where this market goes. It won't be Europe."

Materials and industrials were the strongest Standard and Poor's sectors, followed by energy and financials. Financial shares had been trading lower overnight, after Standard and Poor's late Tuesday downgraded a number of names in the sector and changed its outlook on others. The sector was up 4 percent at midday, on optimism the central bank move would easing financial conditions.

Follow Patti Domm on Twitter: @pattidomm

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.