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Wall Street awaits Santa Claus

NEW YORK, Dec 12 – Some on Wall Street believe a Santa Claus rally will deliver more gains in the final weeks of the year, while others are playing it cautious until an upcoming Federal Reserve meeting is over.

Stock market participants are largely upbeat about the economic recovery, but whether the huge rally that began in March can be sustained remains an open question.

In the week to Friday, the Dow Jones Industrial Average of 30 blue chips rose 0.8 percent to 10,471.50.

The technology-heavy Nasdaq composite however drifted down 0.18 percent to 2,190.31 while the Standard & Poor\’s 500 broad-market index eked out a gain of 0.04 percent to 1,106.41.

The market action over the past week "may signal the beginnings of a multi-week Santa Rally," said Duncan Davidson at VantagePoint Venture Partners, referring to the traditional gains around the year-end holidays.

But many analysts say it may be hard to build on the gains of some 60 percent for the broad market in the current environment.

"Stocks are facing a number of crosscurrents," said Bob Doll, chief investment officer at BlackRock.

Doll said the "bullish" argument cited a positive economic environment with inflation contained. But bears argue that consumers and the banking system remain under pressure and "equity-unfriendly government initiatives such as the calls for higher taxes and protectionist-oriented trade policies will act as headwinds to derail the bull market."

"Over the longer term, however, our outlook is that the economic recovery is for real, policymakers remain committed to promoting a pro-growth environment and stocks should continue to move higher, although in a volatile manner," he said. "As such, we think it makes sense to ride out any downturns."

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Stock market action is often cautious around the time of Fed meetings, and speculation has swirled around whether the central bank will make a move toward an exit strategy from its huge stimulus effort at a two-day meeting opening Tuesday.

While some traders have begun to price in rate hikes in 2010, Michael Gregory at BMO Capital Markets said this may be premature. He argues that the Fed will continue to pump money into the economy at least until March.

"The big question is how long will policy remain on hold afterwards?" he said.

"Signs of the recovery are getting stronger by the day, but we remain attuned to the factors that may suppress the speed of ascent over the next year," said James Marple at TD Bank Financial Group.

Gregory Drahuschak at Janney Montgomery Scott said the market appears to be pricing in modest growth in US gross domestic product in 2010, and that any upside surprise could spark more gains.

"From a stock market standpoint, GDP growth that exceeds the presently muted estimates for 2010 likely would extend the market\’s rally significantly," he said.

Drahuschak said it is reasonable to see the S&P 500 get to 1,200 in the coming months and that "it would not be surprising to see 1,400 reached if we get an upside GDP surprise in the first half of 2010."

But he said markets should not get too far ahead of the economy.

"For the time being, however, guessing about mid-year 2010 GDP is foolhardy. There are many more economic reports to come in the next few weeks that should shed more light on 2010 GDP potential," he added.

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In the coming week, the markets will see data on inflation, industrial production and housing starts, although the Fed meeting may draw the most attention.

Bonds fell as the market looked for signs of a stronger economy. The yield on the 10-year Treasury bond rose to 3.540 percent from 3.483 percent a week earlier and that on the 30-year bond increased to 4.497 percent from 4.413 percent. Bond yields and prices move in opposite directions.

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