Market Insider

Stock rally could depend on oil pressure

Pro: I'm out. Market risk not worth reward
Pro: I'm out. Market risk not worth reward

The Fed may have helped prime the stock market for a Santa rally, if oil remains calm and there are no new flare-ups in overseas markets.

Stocks rocketed higher in the best day of the year Wednesday, led by a giant 4 percent leap in the energy sector and on calming words from the Fed on the economy and its plans to be patient about hiking rates.

The central bank, with its statement and press briefing, sent stocks on a volatile ride, first higher, then lower and higher again. The ended the day up 1.7 percent to 17,356, and the S&P 500 rose 2 percent to 2,012.

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"For these violent up or down swings, you need to see follow-through to make sure it's not a one-day phenomena," said Mark Luschini, chief investment strategist at Janney Montgomery. "Clearly we weren't sure we were going to get it (a rally) prior to Christmas. Then instead, unless this was massive short covering, this was a big deal and (the S&P) crossed back over the 50-day moving average at around 2,002. We closed rather healthily above that number."

On Thursday, traders will be watching weekly jobless claims data at 8:30 a.m. ET, and the Philadelphia Fed survey and leading indicators, both at 10 a.m. ET. Focus will also be on Russia, and whether its central bank can keep the currency steady. The ruble is now down 88 percent against the dollar for the year.

Read MoreCramer:Time to tame the oil beast

From the perspective of markets, not much changed with the Fed statement or briefing by Chair Janet Yellen. The central bank continued to say it would hold rates low for a "considerable time," confusing markets which expected it to eliminate that phrase. But it added the word "patient," as expected, a signal to markets that it is seriously moving toward a rate hike but not if the economy is too weak.

Yellen also said the Fed would wait a "couple" of meetings before raising rates, which kept the market guessing about the timing and whether the Fed would move it forward or keep in the third quarter as expected. The federal funds futures did not move on the central bank though the bond and stock market did.

Are oil prices hitting bottom?
Are oil prices hitting bottom?

"You have a surging equity market which says to me the equity market liked the positive assessment on the economy. You have a surging rate market as it pertains to yields, and a surging dollar. Those are hawkish reactions," said Adrian Miller, director of fixed income strategy at GMP Securities.

While some market participants heard a hawkish Fed, one of the most dovish moves it made was to actually show a changed view of rates for 2015. The Fed projections for interest rates from officials show a lowered median rate next year for fed funds.

Read MoreTime to go long in energy stocks?

"If you look at the median average fed funds expectations by the numbers for 2015/2016 and 2017, it marginally drifted lower which to me dials back anxieties from the bond market that the pace of the hikes was going to be more aggressive than they would like," Miller said. He said the median for 2015 from Fed officials is now 1 1/8 percent, down from 1 3/8.

Stocks were rallying ahead of the Fed statement, as oil stabilized and energy stocks surged. The market seemed to react well to the fact the Fed discussed problems in Russia and elsewhere and did not see them as so negative that they needed to include them in its statement. It also stressed that low inflation was the result of low energy prices, and it viewed that as transitory.

Read MoreOil stocks see 'bottom' in crude, but analysts do not

"The Santa rally had been hijacked by the energy market. If the energy market behaves itself, and we don't hear any negative news out of wherever, you could see the Santa rally continue into the year-end. The equity market is reacting to a Fed that is increasingly comfortable that the economy might have improved to a pace that afforded them the ability to use the word 'patient,'"said Miller.

While oil equities surged, oil analysts said they don't believe the oil market has yet bottomed though some say it is not far off.