The question of the day (in this business, sometimes knowing the question is more important than having the answer) is whether or not the current joyride to the upside, which has taken the S&P 500 up nearly 100 points (97.91 to be exact) or +4.96 percent in just 3 days, can be trusted.

From a pure technical standpoint, a blast like the market saw last week is referred to by some analysts as a "thrust," which has historically been a harbinger of good things to come. The thinking is that if a market surges higher in a very short period of time, buyers must be anxious to get in. Thus, a blast in prices is usually accompanied by additional gains down the road.

To clarify, none of the indicators which measure a true "thrust buy signal" in terms of either price, breadth, or volume, have flashed green as of yet. However, should the current jaunt go on much longer, there will likely be green flags waving from this group.

The problem though, is at the beginning of last week the market appeared to be fraught with risk. The S&P had just fallen 5 percent in just 7 sessions on fears about oil, high yield defaults, Russia, deflation, etc. And then, before you could find a chart of oil dating back to the 1980's - BAM! - the market has returned to all-time highs.

One of the first things to note about the recent action is that "V" bottoms have been the norm in 2014. Once each and every decline became ugly, something came along to cause traders (or perhaps more accurately, traders' computers) to simply "go the other way" - in a hurry.

S&P 500 - Daily

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There has been no basing activity. There have been no retests. Nope, every "dip" has been bought - and usually in a rather aggressive fashion.

Therefore, the thinking is that this time will be no different and that it is likely to be up, up, and away from here.

Should We "Trust the Thrust?"

Ned Davis is famous for coming up with iconic phrases such as "Don't fight the Fed" and "Don't fight the tape." However, another phrase that the firm's clients are quite familiar with is, "Trust the thrust." Again, the historical data suggests that a thrust in the market tends to usher in strong gains over the ensuing 30 days as well as the next 3-, 6-, and 12-months.

However, this time around, the move feels more than a little "news driven" and as such, could be more a case of high-speed trading algorithms doing their thing each day.

Reasons For the Move

The excuses du jour for the blast higher have been many and varied. First there is the topic of oil.

U.S. Oil Fund ETF (NYSE: USO)- Weekly

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Traders know that the type of crash that is happening in oil prices has to end somewhere. However, given the devastation that has already occurred and the fact that lots of folks are talking about lower oil prices ahead, traders have been reluctant to try to "catch a falling knife."

Yet, one of the reasons given for the recent surge in stock prices has been the idea that oil prices have stabilized over the last 4 days. The idea is that if the worst of the dive is over, then the global economy might be okay going forward.

U.S. Oil Fund ETF (NYSE: USO)- Daily

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On the topic of stabilization, another reason for the move up in the stock market has been the improved action in Russia.

Market Vectors Russia ETF (NYSE: RSX)- Daily

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The question of course, is if the violent drops in oil, Russia, and the emerging markets is over. To be sure, the first step to ending these waterfall declines is for prices to stop falling. Next, would be a reflex rally. Then a retest of the lows. And finally, the base-building phase. So, it is safe to say that at this point in time, it is still early in the process.

The Fed and the Calendar

Other reasons for traders suddenly hopping back on the bull band wagon include the Fed and the calendar.

The "liquidity trade" has been a big deal in the market for quite some time now as all that money being printed by central bankers has to go somewhere. And since money tends to go where it is treated best, a great deal of the fresh cash has found its way to the U.S. stock and bond markets.

The worry though has been that the Fed would ruin the party by pulling the punch bowl prematurely. Everybody knows that "fighting the Fed" is a bad idea and as such, if the Fed were to begin raising rates before June of next year, well, it could become a problem...

However, with Janet Yellen deftly swapping "patient" for "considerable time" last week, traders can now rest assured that unless the U.S. economy gallops higher from here, the Fed isn't likely to do anything unexpected.

And then there is the calendar.

Whether you prefer to call it the "year-end rally" or the "Santa Claus rally," the bottom line is that stocks tend to be sloppy in the first half of December and then rally in the second half. Therefore, it isn't terribly surprising to see that traders and their computers have been falling all over themselves lately trying to get into the seasonality trade.

And then when you consider that 2014 has been a disappointing year for most managers (remember, although the S&P is up 12 percent year-to-date, the average stock is up only 1.3 percent in 2014!), the combination of dip-buying and performance anxiety seems to also be prompting managers to simply hold their nose and put any/all available cash to work here.

Which brings us to the title of this morning's somewhat meandering market missive: Can they be trusted (meaning the "V" bottoms)? The answer would appear to be, yes - for now.

However, if oil/Russia/high yields were to start diving again, it could be another story entirely...

Happy Holidays to all!

Turning To This Morning

Stocks enter this Holiday week in a positive mode. Wall Street rallied on Friday. Oil is trying to stabilize. Russia isn't tanking. High Yields are rebounding. And so, it isn't terribly surprising to see that foreign markets are higher across the board this morning. However, the focus continues to be on the price of oil. And it is a decent bet that if crude begins to break down again, so too would the recent buoyancy seen in the stock market. In fact, futures in the U.S., while still green, are off their highs in response to crude giving up early gains. But for now, it appears that Santa has once again delivered to Wall Street.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
    Japan: +0.08%
    Hong Kong: +1.26%
    Shanghai: +0.59%
    London: +0.99%
    Germany: +1.28%
    France: +0.81%
    Italy: +0.50%
    Spain: +0.15%

Crude Oil Futures: -$0.39 to $56.74

Gold: -$0.80 at $1195.20

Dollar: lower against the yen and euro, higher vs. pound

10-Year Bond Yield: Currently trading at 2.183%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +8.55
    Dow Jones Industrial Average: +82
    NASDAQ Composite: +6.02

Thought For The Day:

The only way to do great work is to love what you do. -Steve Jobs

Positions in securities mentioned: None

Wishing you green screens and all the best for a great day,

David D. Moenning
President, Chief Investment Officer
Heritage Capital Research
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