"Investors sound like they're picking up some Christmas spirit and that should help the market," said Jack Ablin, CIO at Harris Private Bank. "It's clearly all psychological and I think attitudes are improving, at least among institutional investors."
Strategists, however, don't expect the rally, if it does materialize, to extend much into 2012. Several see relatively small gains for next year as the U.S. economy grows sluggishly, Europe potentially slides into recession and China risks a hard economic landing.
Stocks have been whipsawed by months of misfires, then progress, then more misfires by Europe's leadership as they struggle to take their loosely held union to the next step of fiscal unity.
"The (European) problems are not going away, but it's sounding like they're trying to get their arms around it," Ablin said. "If they can coordinate policy with a much more flexible central bank, they can take a much longer term view of their problems."
Last week, the European Central Bank, the Fed and four other central banks stepped in to extend swap lines and make dollar borrowing cheaper for strained European banks. At the same time, the ECB appeared more accommodative and key leaders seemed to be moving in a more collaborative way. Markets improved, and U.S. stocks have gained about 8 percent since a week ago Monday.
German Chancellor Angela Merkel and French President Nicolas Sarkozy this week continued the appearance of progress. They met Monday and announced intentions to change the EU treatyto allow for a tighter fiscal unity and oversight.
Standard and Poor's, after Monday's bell, said it was putting 15 of the 17 EU nations on credit watch for a possible downgrade, and on Tuesday it said it was putting the European Financial Stability Fund, or bail out fund, on credit watch as well. Markets were rattled by the move and European stock markets ended Tuesday lower, while the Dow and S&P scored slight gains.
"Our year-end target was 1260 (on the S&P). I wouldn't be surprised if we didn't push it a little further," said Barry Knapp, head of equity portfolio strategy at Barclays. "That also supposes that we break the problem of (European leaders) over promising and under delivering, and everything comes out great."
Knapp said he expects stocks to have a rocky start to 2012, and his target is 1150 for the first half. But by year end, he expects more clarity around the European situation and U.S. election and he sees the S&P going to a level of 1330.
Not all analysts have visions of a Santa rally.
"This December may be the exception for a year-end rally… we’re in the eye of the storm," said Bruce McCain, chief investment strategist at Key Private Bank.
"We may have seen the peak for this rally at the end of October. The closer we get to 2012, the poorer the outlook. Europe’s economy is tilted into recession or at least toward significant slowing and we don’t see any significant solutions in the near term to lift [Europe’s] economy," he said.