Banks Stocks Herald Santa Claus Rally: Fast Money Pros

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."

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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.”

What do you think? We want to know!

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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

Steve Grasso
Stuart Frankel and its partners own
Stuart Frankel and its partners own CSCO
Stuart Frankel and its partners own CUBA
Stuart Frankel and its partners own GM
Stuart Frankel and its partners own GERN
Stuart Frankel and its partners own HPQ
Stuart Frankel and its partners own HSP
Stuart Frankel and its partners own HSPO
Stuart Frankel and its partners own MU
Stuart Frankel and its partners own NEM
Stuart Frankel and its partners own NYX
Stuart Frankel and its partners own PRST
Stuart Frankel and its partners own RDC
Stuart Frankel and its partners own UAL
Stuart Frankel and its partners own XRX

Patty Edwards
Trutina Financial is long COST
Trutina Financial is long BA
Trutina Financial is long INTC
Trutina Financial is long KMP
Trutina Financial is long VLO
Trutina Financial is long ED
Trutina Financial is long NKE
Trutina Financial is long TGT
Trutina Financial is long COP

Liz Dunn
The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd ABN 94 122 169 279 (AFSL No. 318062) (MGL) and its related entities (the Macquarie Group) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Todd Gordon
No disclosures

Brian Marshall
(JNPR): Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in this Report. No person(s) responsible for preparing this report or a member of his/her household serve as an officer, director or advisory board member of any of the subject companies. Neither ISI nor its affiliates have any investment banking or market making operations. At various times these reports mention clients of ISI from whom ISI has received non-investment banking securities related compensation in the past 12 months.

Zack Karabell
River Twice owns IBM
River Twice owns ORCL

Srini Sundararajan
Oppenheimer & Co. Inc. makes a market in the securities of INTC. with wires.