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Santa Claus Rally !

The Santa Claus rally in stock markets began in earnest last week when all major US indexes went up by close to 3%. This is despite digesting lot of bad news coming from European debt crisis and US unemployment report. If markets can rally on bad news, imagine what can happen when good news start coming. As always stock markets are normally ahead of economy by about 6 months and it is expecting economy to pick up early next year. Retail sales on Black Friday and Cyber Monday were much better than expected. The momentum should continue for next three weeks. People are tired of "not able to enjoy" and hence they are willing to spend little more during this holiday season on themselves.

Let's look at some of the catalyst for markets to keep going:

  • Europe which is fast becoming "bailout" continent puts its house in order by expanding it's stability fund over trillion euros
  • Obama and republicans extend Bush tax-cuts for 2 years and also extend unemployment benefits
  • BRIC countries keep their rapid growth - the momentum is tremendous
  • Retail sales beat most optimistic forecasts
  • M&A activity picks up - in some Internet sectors, it's almost like dotcom days. When Groupon rejects a $6 Billion buyout offer from Google, one can see why there is so much excitement in this sector again
  • Oil is heading back to $100
  • Treasury yields on 10-year notes are back above 3% - this means that bond markets are pricing economic growth and no fear of deflation. Normally this scenario is good for stocks
While there are still quite a few uncertainties, there are lot of things going on which could serve as positive catalysts for markets. I am sticking with my forecast of DOW around 11500 by year end.

When it comes to individual stock recommendations, take a look at SFI-PD around $15 (yielding 14%), CIM at $3.90, GEN (used to be RRI) at $3.60, SRZ at $4 and APOL at $35.

Have a great week !

/Shyam

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