Speculative Stocks Rallying: A Reversal Signal for the New Years Rally?

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The last three weeks have been great for stock market bulls, but Mark Hanna at Market Montage isn't buying into the hype.

"Long time readers from 2008, 2009, 2010 will remember how I usually saw rallies play out -- it would start with leadership stocks, move into "solid" stocks, and eventually get down to the most speculative of stocks. When the latter happened it was time to prepare to batten down the hatches."

And by looking at Friday's price action, he's got a point.

"Guess what is moving today? Solar (off an analyst note), Chinese small caps, and the most beaten down (see Sears)," he points out. "The only "good" sector I see joining the move are the homebuilders -- which have been hot since October -- off of Lennar's earnings. Not all of these are "bad" companies -- some have just been left behind and finally are getting attention, but by and large it's a move of stocks with many warts."

According to Hanna, the stock market's move to "junk" stocks doesn't mean the move ends tomorrow, but we're getting long in the tooth here...

Business section: Investing ideas
Hanna argues that investors are moving into more speculative stocks that have been beaten up over the last few months.

So, which of these stocks are expected to see the biggest upside?

For ideas, we collected data on institutional money flows and identified a list of the worst performing S&P 500 stocks that have seen significant institutional outflows during recent months.

Short-sellers, however, appear to think that most of the bad news is already priced into these stocks.

All of these companies have seen a significant decrease in shares shorted during the current month. In other words, short-sellers have reduced bets that these stocks are going to decline -- their positioning suggests the upside potential of these stocks outweighs the downside.

Do you agree with the short-sellers? Are these beaten-up stocks ready for a rebound? Will the move to "junk" stocks support the bullish potential of these companies?

List sorted by performance over the last year. (Click here to access free, interactive tools to analyze these ideas.)

1. Netflix (NAS: NFLX) : Provides subscription based Internet services for TV shows and movies in the United States and internationally. The stock has lost 51.22% over the last year. Net institutional sales in the current quarter at -2.9M shares, which represents about 5.67% of the company's float of 51.16M shares. Shares shorted have decreased from 10.87M to 9.88M over the last month, a decrease which represents about 1.94% of the company's float of 51.16M shares.

2. United States Steel (NYS: X) : Produces and sells steel mill products in North America and Central Europe. The stock has lost 49.10% over the last year. Net institutional sales in the current quarter at -9.8M shares, which represents about 6.84% of the company's float of 143.22M shares. Shares shorted have decreased from 35.97M to 33.95M over the last month, a decrease which represents about 1.41% of the company's float of 143.22M shares.

3. Cliffs Natural Resources (NYS: CLF) : Produces iron ore pellets, lump and fines iron ore, and metallurgical coal products. The stock has lost 18.39% over the last year. Net institutional sales in the current quarter at -6.0M shares, which represents about 4.22% of the company's float of 142.11M shares. Shares shorted have decreased from 8.83M to 7.25M over the last month, a decrease which represents about 1.11% of the company's float of 142.11M 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 Eben Esterhuizen does not own any of the shares mentioned above.

At the time this article was published Motley Fool newsletter services have recommended buying shares of Netflix. 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.

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