NEW YORK (Reuters) - Wall Street set another record this week, and the rally that has taken the S&P 500 index nearly 30 percent higher for the year shows no sign of losing steam as Americans prepare to celebrate the Thanksgiving holiday.
Supporting this scenario, December is historically the strongest time for stocks.
Trading volume is likely to be light as U.S. stock markets will be closed on Thursday for Thanksgiving and open a half-day on Friday.
The Dow closed above 16,000 and the S&P 500 above 1,800 for the first time this week, but rather than being anxious about a pullback or a correction, investors are afraid to miss the expected Christmas rally.
"The market finally feels comfortable about not having a meaningful correction (this year), that it's OK not to, as we enter a traditionally strong time of the year," said Ryan Detrick at Schaeffer's Investment Research.
The CBOE Volatility index VIX .VIX, Wall Street's so-called fear gauge, is around 12, a calm zone considering that Wall Street has recorded seven consecutive weeks of gains.
Analysts say with most of the year's big events, like third-quarter earnings, out of the way, there is little to curb investors' risk appetite. The market is not expecting a surprise from the U.S. Federal Reserve's December meeting.
Investors are skeptical over the prospects for a December tapering of stimulus, preferring to focus on March as the starting point for a reduction in the flow of Treasuries and mortgage bonds bought by the Fed, said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co.
"A Santa Claus rally appears on the cards," Wilkinson said.
While short-sellers are taking out greater positions betting against the U.S. market gains, they are doing so in less traditional sectors, according to SunGard's Astec Analytics.
The number of U.S. shares being borrowed - the prerequisite for short selling them - is on the rise, but when broken down by sectors, "the image is perhaps not what we might imagine," said Karl Loomes, market analyst at SunGard's Astec Analytics, in a note to clients.
Classically when investors expect a stock market turnaround, whether for the better or worse, high-beta stocks such as information technology companies are the first to see action.
But over the last two months, the areas where traders have been betting on declines have been energy producers and metals and mining, with the number of shares borrowed up more than 20 percent for both sectors. Energy and mining sectors are more dependent on the world economic outlook, far beyond the shores of the United States.
Traditionally more volatile and first-play sectors, such as financials and information technology, have seen far more muted gains in being borrowed - just 5.1 percent and 7.5 percent, respectively.
"On the plus side, however, this focus on sectors related to the global economy may mean the markets can absorb a domestic hit, such as the end to (quantitative easing), with some robustness," Loomes said.
Retail stocks are likely to be in focus next week as "Black Friday" - the day after Thanksgiving when shoppers take advantage of super deals designed to kick start the holiday retail season. Black Friday, when many stores' accounts go from red to black - begins sooner this year.
Major retailers including Target (TGT.N), Best Buy (BBY.N), Macy's (M.N) and Walmart (WMT.N) are beginning their sales around dinner time on Thanksgiving day. Internet retailer Amazon.com (AMZN.O) has already started marking prices down.
Approximately 89 million shoppers flocked to stores during Black Friday weekend last year, with nearly half finishing all or most of their shopping, according to the National Retail Federation.
December is historically seen as the best month for the Dow and the S&P 500, thanks to a frequent year-end surge by stocks called the "Santa Claus rally."
Since 1929, the return on the S&P 500 for December has been about 1.5 percent on average. For the Dow, the average return has been about 1.3 percent on average from 1910 to 2010.
Investors will get a better sense of the state of the housing sector next week. Data on Monday is expected to show pending sales rose in October, and a report on Tuesday is seen showing an increase in groundbreaking on homes that month and an increase in prices in September.
Other economic data due next week include durable goods orders, jobless claims, Chicago PMI and consumer sentiment, all due on Wednesday.
(Reporting By Angela Moon; Editing by Kenneth Barry)