Santa Claus can skip Wall Street this year.
With stocks on a seemingly relentless tear higher, the elves can go to the Bahamas and Rudolph can rest his red nose.
So long as the dollar stays weak, the economy continues to show signs of improvement and no major geopolitical events explode on the horizon, most analysts think the market is headed higher regardless of a Santa Claus rally.
"If I had to lean one way or the other towards a Santa Claus rally I'd lean towards it," says Darin Pope, chief investment officer at United Advisors in Secaucus, N.J. "But this year has been one of those years where it's been a different dynamic than in the past."
Pope thinks the end-of-year rally will be more about Fed Chairman Ben Bernanke and Washington policy makers than about the North Pole's most famous resident.
"The singular theme that everybody is talking about is really the fiscal responsibility-weak dollar play," he says. "Clearly we're seeing people pile into the market on areas that play on that theme."
Strictly speaking a Santa Claus rally is defined as a trend upwards in the week between Christmas and New Year's, when holiday buoyancy tends to lift markets higher. But market pros often use the term more generically to describe any type of rally that coincides with the holiday season.
This year, though, the market seems to need little help from the jolly fat man in the bright red suit.
The "fiscal responsibility-weak dollar" play to which Pope refers describes the government's willingness to keep the US currency weak and deficit-spend to generate economic growth. Analysts see the cheap dollar as the key ingredient towards keeping assets inexpensive and luring investors into risk.
It's a trade that has held up through spring, fall and the early signs of winter, unwilling to be derailed even by global tremors such as the credit crisis that surfaced last week in Dubai.
If Santa wants to join the party, all's the better.
"People are talking about a Santa Claus rally and seasonality," says Richard Sparks, senior analyst at Schaeffer's Investment Research in Cincinnati. "I see more the mechanics of the market driving it higher. There's a lot of cash still out there on the sidelines. Institutions were overweight on cash and underweight on stocks and they've been forced to participate in the rally."
If there's any disagreement about the rally, it's what will be the specific growth areas of the market.
Lower-quality companies that were decimated during the market's plunge from October 2007 to March 2009 have joined commodities to lead this year's rally.
Some analysts think the next leg up will be led by large-cap companies that underperformed during the market's 60 percent bounce off this year's lows. Holding bluechips could be especially important if the market enters any kind of correction phase where high-beta stocks give back some gains.
"You have to stick to large-caps here in order to protect yourself," says Michael Cohn, chief investment strategist at Global Arena Investment Management in New York. "The large-caps are OK because they have business, they can borrow money, they don't have a credit crisis anymore for the most part. Small businesses are still in a credit crunch and I don't see that changing anytime soon."
Analysts at BofA Merrill Lynch Global Research recently observed that commodities are showing "signs of excess speculation" and warned that a correction could be coming for that group—though not for the broader stock market—before the end of the year.
"The market is building a tactical bear market rally for the US Dollar in our view, and this would be a short-term negative for commodities," analyst Mary Ann Bartels wrote in a research note.
But with stocks moving higher, United's Pope suggests continuing to play the weak dollar over the longer term with "gold, hard assets, multinationals, international markets...anything that plays on the weak dollar. I think that's where people are playing this now."
To be sure, the market faces headwinds.
Quick action in the Dubai situation helped mitigate damage to markets, but fear persists that the situation in the Middle East crossroads could be the precursor for similar troubles in other countries.
Friday's unemployment number also could shake investors if the jobless rate continues to rise. A Wall Street Journal report Tuesday indicated that highway construction jobs created through government stimulus are winding down and could pose trouble for the employment situation.
"I personally think we're trading on hope," says Kathy Boyle, president of Chapin Hill Advisors in New York. "We're at the top end of the range."
Yet even Boyle, who takes mostly bearish positions on the market, acknowledges the strength of the rally.
"Could we go another 5 to 10 percent higher? Absolutely," she says. "We still think there's going to be a major correction coming."