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Don't ignore what could be the jolly season for stocks

Stocks had their best week of the year and the upswing could continue into Thanksgiving week, usually a good one for the market.

The S&P 500 finished Friday up 3.3 percent at 2,089, its best weekly performance since last December, after logging a 3.6 percent decline the previous week. The Dow rose 3.4 percent, its best week in six.

"People are confounded when the market sells off in August and September and rallies in October. Seasonal patterns tend to be very real and this year's proving no exception," said Julian Emanuel, equity and derivatives strategist at UBS.

"I think the market is comfortable with a resolution of uncertainty. Even if it has potentially negative implications, it's not always a bad thing. People are comfortable with the Fed going to hike in December, and moreover the market is trading this way as if that hike was going to act as an affirmative signal."

Santa Claus waves to the crowd during the Macy's Thanksgiving Day Parade in New York City.
Getty Images
Santa Claus waves to the crowd during the Macy's Thanksgiving Day Parade in New York City.

The past week was important in that markets were able to absorb more evidence from the Fed meeting minutes that the central bank plans to raise interest rates in December, unless the economy turns down. The yield on the two-year Treasury, sensitive to Fed policy, rose above 0.9 percent Friday, a more than five-year high.

Strategists had started the week expecting more selling after the coordinated terror attacks in Paris that killed scores. But equities proved resilient and the anticipated flight-to-safety trade did not materialize.

Stocks usually gain in the week of Thanksgiving, and many analysts expect the market to continue higher — even into year-end, though its course could be choppy at times. According to analytics service Kensho, the S&P 500, in the last 10 years, has averaged a gain of 1.9 percent in that week and was positive six times. One possible negative for the week ahead could be further selling in oil, which dipped below $40 several times in the past week.

"The thing with December — because the Fed is there smack in the middle of December — it's hard to say whether it's going to be front-loaded or back-loaded," said Emanuel. "We feel like you could rally straight through the employment report, then take a breather and in all likelihood, Santa will appear and then you rally into year-end."

Read More This is what the bond market is saying about the Fed

The Fed's meeting is Dec. 15 and 16, and the most important piece of U.S. data central bank officials will get before the meeting is the November jobs report Dec. 4.

Nonetheless, markets will be focused on a busy rush of economic data in the first three days of the coming week. Starting with existing-home sales Monday, there is also consumer confidence and a second look at third-quarter GDP on Tuesday, but Wednesday's personal income and spending data will be most carefully watched. It includes the PCE deflator, the Fed's preferred inflation measure.

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The core PCE deflator could have posted another 0.1 percent monthly advance for October, the sixth in a row, according to Stephen Stanley, economist at Amherst Pierpont. He expects the year-over-year increase in the core PCE deflator to remain at 1.3 percent. There is also durable goods data Wednesday. There are a few earnings, including Hewlett Packard and Tiffany's on Tuesday, and Deere on Wednesday.

In the past week, the best-performing sector was consumer discretionary, up 4.5 percent, its best week in three years. Retailers rallied after taking a drubbing the week earlier as some big names reported disappointing earnings, amid worries about the consumer and health of the industry.

The energy sector was up 1 percent in the past week, and it was the weakest performer. West Texas Intermediate crude prices were up 2 percent, with the January contract closing at $41.89 per barrel Friday. Crude was down 8 percent the week before.

Read MoreInvestor: Fed's focus on China a grave mistake

"What's been encouraging is the rally broadened out where you had the Russell 2000, the bios participating and retail bounced back after a really hard last week. The fact Apple rejoined the rally this week gave the bulls a psychological boost," said Scott Redler, partner at T3Live.com. Apple was up more than 6 percent for the week, helped by a recommendation from Goldman Sachs.

"The constructive action by the bulls will remain intact as long as the S&P holds 2,065-ish. The longer we hold that pivot, which is the top third of this week's rally, the higher the probability we extend to 2,100, and the S&P tests the year high around Christmas," said Redler.

Many strategists agree the stock market can finish the year with a gain. But many do not expect the market to rally that much from here, and some see a sell-off looming in the first quarter. The S&P 500 is up 1.5 percent for the year, and the Dow is flat on the year.

Emanuel said he expects the market to continue to rally into the first quarter, in part on a crush of anticipated mergers as companies scramble to get deals done as far ahead of the presidential election as possible.

Read MoreHoliday rush: 10 stocks to buy before Black Friday

But Ari Wald, technical analyst at Oppenheimer, disagrees. He points to a bifurcated market where many stocks have underperformed.

"We think there's something lurking here," he said. "Seasonally, it would make sense for it to play out in the first quarter."

Wald said there could be some rough spots before year-end but the market should move higher. "Around the first rate hike, there tends to be some volatility. I'd be more worried about the small caps there. We would rather sell Russell 2000. Big-cap growth looks great. Small-cap growth, not so much," said Wald.

What to watch

Monday

Earnings: GameStop, Tyson Foods, Brocade, Trina Solar

10:00 am: Existing home sales

1:00 pm: $26 billion two-year auction

Tuesday

Earnings: Hewlett-Packard, Tiffany, Cracker Barrel, Analog Devices, Dollar Tree, Campbell Soup, Chico's FAS, Burlington Stores, Seadrill, Signet Jewelers, TiVo, Guess, Eaton Vance, Hormel Foods

8:30 am: Q3 GDP (second)

9:00 am: S&P/Case-Shiller home prices

9:45 am: Manufacturing PMI

10:00 am: Consumer confidence

1:00 pm: $35 billion five-year auction

Wednesday

Earnings: Deere, Donaldson

8:30 am: Initial claims

8:30 am: Durable goods

8:30 am: Personal income

9:00 am: FHFA home prices

9:45 am: Services PMI

10:00 am: New-home sales

10:00 am: Consumer sentiment

1:00 pm: $29 billion seven-year auction

Thursday

Thanksgiving holiday

Friday

Black Friday

Stock market closes at 1 p.m.

*Planner subject to change

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.

Correction: S&P 500 had its best week since last December, not October