THE HOLIDAY SEASON TENDS

to be a jolly time for investors. In four of the past five years, stocks rose in November and December. And according to the

, the Standard & Poor's 500 index historically has risen an average of 1.7% in November and 1.8% in December. Those aren't small gains; the November figure works out to 20.4% on an annualized basis.

Will a late-year rally unfold this year? At least two of our pundits are feeling quite bullish about the prospect.

Smith Barney's Tobias Levkovich argues that this is the time to take advantage of market weakness. The S&P 500 dipped 1.8% in October, though a rally starting around the time that Harriet Miers withdrew her Supreme Court nomination eased the pain. Levkovich says four of his proprietary models are sending buy signals. The S&P 500's trailing price/earnings ratio is just under 16. "Historical readings between 14 and 16 have been followed by an average 12-month index gain of 17%," he writes in a research note dated Oct. 28.

Levkovich suggests his clients move away from a strict sector-strategy approach and toward large-cap stocks in general. In particular, he likes the mega-cap companies, or roughly the 25 largest companies in the S&P 500, including Time Warner.

"We are less convinced that sector or industry-group focus is the source of investment success anymore," he writes in a note dated Oct. 27. "The investment community has spent its time and money developing strong in-depth analysis by industry, with both buy- and sell-side analysts focusing their daily work to unearth investment gold mines in very narrow [areas]. This means that the ability to find something new and exciting is far more limited than many might perceive."

Oak Associates' Ed Yardeni is also bullish. While he acknowledges that there's still plenty of bad news out there to spook investors, including the fear of weaker consumer spending and higher interest rates, he believes much of this is already priced into the market. That leaves Wall Street able to look ahead and focus on some good news that should unfold during 2006. Yardeni expects the Federal Reserve to stop raising interest rates by early summer, and says consumer spending should pick up again by the spring.

PNC Advisors' Jeffrey Kleintop argues that there are three potential catalysts for a rally: solid third-quarter earnings growth, evidence of resilient consumer spending and cooling core inflation, and for the Federal Reserve to make its final interest rate increase of this cycle at the Jan. 31 Federal Open Market Committee meeting. He isn't betting on a strong finish to 2005, but has set a year-end 2006 target on the S&P 500 of 1375 to 1425.

In a bit of a reversal, Charles Schwab's Liz Ann Sonders is no longer advising clients to overweight equities. She writes that she is neutral on the market and expects stocks to remain range-bound for the immediate future. "Our bias has been more upward, but it has become increasingly difficult to remain overweight without more clarity on the nature of elevated inflation pressures, the length of the Fed's tightening cycle and energy prices and the collective impact on the economy and equity valuations," Sonders writes in a research note dated Oct. 21.

ISI Group's Ed Hyman also believes investors shouldn't hold their breath waiting for a rally. "History tells us that the U.S. stock market will continue to be stuck until the Fed stops tightening," he writes in a note dated Oct. 24. He doesn't expect that to happen anytime soon.

As if the Fed and slowing earnings growth weren't enough to keep investors up at night, Bank of America Securities' Thomas McManus is also worried about a slowdown in the housing market and what that could do to stocks. He warns clients to stay away from the consumer discretionary sector, as well as banks and some other financials, as it appears that slowing housing activity might pressure the purchasing power and spending plans of an increasing number of customers.

With the short-term outlook for both stocks and bonds looking cloudy, one has to wonder where a cautious strategist would put his money. Lehman Brothers' Henry "Chip" Dickson likes energy and drug companies, in part because they're among the few industry groups possessing pricing power.

For more of what our pundits are saying, read their latest predictions here.