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
2. Iridium Communications
3. Mercer International
4. United Community Banks
6. Tesoro Logistics LP Common Unit
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.
The Motley Fool owns shares of Iridium Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.