The possibility of a year-end comeback has been widely debated, but nobody can deny that it's happened before. So what makes the possibility of a 2011 fourth-quarter rally so compelling?
The S&P 500 opened in 2011 at 1,257 points, 57 points above the current value as this author writes. MSNBC reports that if the S&P 500 finishes this year with a gain, it will be the biggest turnaround since 1984 -- the last time that the index fell more than 10% and still closed the calendar year in the black.
In 1984, the index closed 1.4% above the year's start. But what are analysts predicting for a 2011 rally?
Between natural disasters, Arab uprisings, the European sovereign debt crisis and the loss of a AAA rating, this year was pretty dismal for U.S. markets. In anticipation of worst-case scenarios becoming a reality, pessimistic sentiment is being priced in left and right, bringing many share prices to their lowest levels in years.
But things might be looking up (or at least looking less severe) in multiple areas. Europe appears increasingly prepared to prevent a widespread crisis from a Greek default; meanwhile consumer spending increased while more jobs were created in the third quarter than Wall Street expected. These positive indicators make the current share values seem overly pessimistic, undervalued, and to many, valuable buying opportunities.
"With dividend payments alone, the S&P index offers a return on par with low-risk U.S. Treasuries. From Aug. 24 through Thursday, the yield on the 10-year Treasury note was below the dividend yield of the S&P 500 index. Since 1962, the only other time that's happened was during the 2008 credit crisis, according to J.P. Morgan." (Via MSNBC)
Furthermore, the S&P index typically gains an average 3.9% in the last quarter from seasonal investors - almost enough to reach 1,257. And investors commonly clean out their portfolio at year-end for tax purposes by selling those that have not performed well and buying up the stocks that have. And because stocks now appear relatively "cheap," the buybacks may be greater than usual.
Still, it may not be much to get excited about. Finishing out the year in the black hardly dispels the reasons we were in the red to begin with. But with the prospect of a year-end rally mere weeks away, it might be sensible to prepare your portfolio.
So how can you spot rebound candidates?
To help you explore this idea, we started with a universe of about 80 stocks that appear to be oversold at current levels (based on the RSI(14) indicator).
To refine the list, we collected data on insider transactions, and identified the oversold stocks that have seen significant insider buying over the last six months.
Insider executives are using their own money to buy into their employers -- do you think this is a bullish signal for these rebound candidates? (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Global Partners (NYSE: GLP): Engages in the wholesale and commercial distribution of refined petroleum products and natural gas, and provides ancillary services in the United States and internationally. RSI(14) at 23.72. Over the last six months, insiders were net buyers of 37,400 shares, which represents about 0.54% of the company's 6.93M share float.
2. Iridium Communications (Nasdaq: IRDM): Provides mobile voice and data communications services through satellites to businesses. RSI(14) at 39.49. Over the last six months, insiders were net buyers of 85,100 shares, which represents about 0.2% of the company's 43.44M share float.
3. Mercer International (Nasdaq: MERC): Mercer International, together with its subsidiaries, manufactures and sells pulp produced from wood chips and pulp logs. RSI(14) at 38.22. Over the last six months, insiders were net buyers of 98,531 shares, which represents about 0.21% of the company's 45.87M share float.
4. United Community Banks (Nasdaq: UCBI): Operates as the bank holding company for United Community Bank that provides retail and corporate banking services. RSI(14) at 39.05. Over the last six months, insiders were net buyers of 165,750 shares, which represents about 0.44% of the company's 37.52M share float.
5. SemGroup (Nasdaq: SEMG): Provides gathering, transportation, storage, distribution, blending, marketing, and other midstream services primarily to independent producers, refiners of petroleum products, and other market participants in the Midwest and Rocky Mountain regions of the United States, Canada, and the West Coast of the United Kingdom. Net institutional purchases in the current quarter at 2.5M shares, which represents about 6.06% of the company's float of 41.25M shares.
6. Tesoro Logistics LP Common Unit (Nasdaq: TLLP): Operates, develops, and acquires assets involving oil and petroleum products. Net institutional purchases in the current quarter at 11.7M shares, which represents about 38.78% of the company's float of 30.17M shares.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Data sourced from Fidelity.
