Although the term is bandied about conversationally, the technical definition of a Santa Claus Rally is a surge in the stock market that happens over the last 5 sessions of the year and the first 2 of the new year.
Earlier in the week, investors were doubtful the seasonal phenomenon would happen this year; the chatter was that the Grinch had stolen Christmas.
However, the latest economic data looked like a holiday miracle for the bulls.New jobless claims hit a 3-1/2 year low last week and consumer sentiment improved in December to its highest level in six months.
Nonetheless, plenty of negatives hang over the market including the ongoingEU debt crisis and the bickering in Congress over the payroll tax.
Considering all the developments, either the bulls or the bears may prevail over the next several sessions. What should you be watching?
Trader Pete Najarian thinks the ‘tell’ will be banks stocks. “Watch the financials,” he says. “They tend to foretell the direction of the broad market – when they perk up the market does too.”
Trader JJ Kinahan says much the same. "If financials continue to rally I’d consider it a good omen at least into year’s end.“
And both traders have spotted positive options action that lead them to believe that a Santa Claus rally is very much on the table. "I still think the S&P marches to 1300 by year's end," says Kinahan.
Looking at action in the banks, "I’m seeing out of the money call buying in the KRE for March," says Kinahan.
“(Also) There’s been big volume in the Jan 27 calls in Citigroup ,” Najarian adds. “That says to me that institutional investors are looking for upside.”
Here's Najarian's key 'tell.' "Watch JPMorgan ," Najarian says. "It's struggled with resitance at $34. If JPM can push above that level, I think the market explodes."
Trader Steve Grasso isn’t so sure.
He’s concerned that the market is again entering an area of strong technical resistance. “Don’t forget that 1257 is flat on year. Plus the 200-day is 1260," he say. And Grasso is putting his money where his mouth is, "I went to 50% cash.”
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Trader disclosure: On Dec. 22, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders: Grasso owns ASTM; Grasso owns AVAV; Grasso owns BA; Grasso owns D; Grasso owns LIT; Grasso owns MHY; Grasso owns PFE; Grasso owns PRST; Grasso owns S; Grasso owns XLU
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