It is no surprise that after a stock market rally that investors want more of a rally.  Dow Theory has been confirming the market rally with gains in transportation and industrial stocks, which you would probably expect considering that the stock market closed on roughly two-year highs on Thursday.  For the market run to continue ahead, there needs to be added gains in financial stocks first and chip stocks thereaf
ter.  The good news is that the fresh outlines hinting at a return of bank dividends may contribute further ahead to Thursday’s late-day gains in financial stocks.  As far as chip stocks participating, this is probably simple from two sources: some of that tempered guidance needs to be raised or investors need to seize upon low valuations.

In financials we are first looking at Direxion Daily Financial Bull 3X Shares (NYSE: FAS) as the go-to leveraged trader ETF, but more specifically we are paying direct attention to J.P. Morgan Chase & Co. (NYSE: JPM) and Citigroup, Inc. (NYSE: C).  In chips, we’d look for new 52-week highs in the Semiconductor HOLDRs (NYSE: SMH), followed by or led by gains in Intel Corporation (NASDAQ: INTC), Micron Technology Inc. (NASDAQ: MU), and SanDisk Corporation (NASDAQ: SNDK) for the second wave higher.

The first and easiest tool to see the direction of the financial stocks can almost always be seen in the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) triple-leverage ETF.  It rose more than 9% on Thursday and is so far indicated marginally higher so far on Friday.  We use this as a daily tool rather than a tool through time.  Tracking errors are a risk here and the moves are more geared to intraday performance.  At $25.08, its 52-week range is $17.05 to $39.74.

J.P. Morgan Chase & Co. (NYSE: JPM) is the healthiest of the banks and likely the first to return to its normal historic dividend trends.  Jamie Dimon’s  bank stock rose more than $2.00 or more than 5.5% on Thursday, and shares have traded in a range of $35.16 to $48.20 over the last year and analysts have an average price target above $52.00.  Thomson Reuters has estimates of $3.84 EPS for 2010 and $4.62 EPS for 2011.  This is a DJIA component, and its gains would translate directly into DJIA gains.

Citigroup, Inc. (NYSE: C) has lost its DJIA-component status, and this remains a stock which could double if the market holds and if it can continue in its turnaround.  Its gains were ‘only’ 3.3% on Thursday as it is likely farther away from a dividend return than its peers.  Shares are indicated flat to slightly lower so far in early Friday indications.  The 52-week range is $3.11 to $5.07 and analysts have an average price target of $4.38.  Citi’s price has to keep rising to help in ‘the turnaround bank’ scenario.  It will not directly create DJIA point gains as it is out of the DJIA, but gains here will lead broader financial gains.