BALTIMORE (Stockpickr) -- Just a month into 2014, and it's already been a rocky road. Since the calendar flipped over to January, the S&P 500 has shed just under 3%. With today's close, January will be the first month since August that closed lower than it started.
The important question now is whether February will bring a return to rally mode -- or whether this is just the start of the selling.
If the last year's price action is any indication, this is nothing new. The S&P's rally over the past year has been nothing if not orderly, and it's come with manageable corrections all the way up. But that doesn't mean that we're still in a "buy everything" market. Corrections, like this one, are your opportunity to unload the junk in your portfolio.
Or worse, the names that are looking "toxic" as we head deeper into 2014.
That's why we're taking a closer look at five "toxic stocks" you should be selling in 2014. To be fair, the companies I'm talking about today aren't exactly junk.
By that, I mean they're not next up in line at bankruptcy court. But that's frankly irrelevant; from a technical analysis standpoint, they're some of the worst positioned names out there right now. For that reason, fundamental investors need to decide how long they're willing to take the pain if they want to hold onto these firms this summer. And for investors looking to buy one of these positions, it makes sense to wait for more favorable technical conditions (and a lower share price) before piling in.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
So, without further ado, let's take a look at five "toxic stocks" you should be unloading.
At first glance, it looks like pharmaceutical services firm AmerisourceBergen (ABC) - Get Report is recovering from some of last week's selling. But looks can be deceiving, and despite yesterday's relief rally, this name still looks positioned for additional downside. Here's why.
While ABC entered last quarter looking pretty auspicious, the stock's uptrend broke at the start of December. From there, shares spent the next two months forming a double top pattern, a price setup that's formed by two swing highs that peak at approximately the same price level. The sell signal came on the move through $68 last week.
Even though this week's pullback to newfound resistance at $68 look positive, they rarely are. Instead, pullbacks after a major breakdown typically are more for reinforcing the glut of supply of shares at resistance than a break from selling. Instead, consider a red candle bounce off of $68 another opportunity to exit a position in ABC at a higher price.
Core Laboratories (CLB) - Get Report announced its fourth-quarter earnings in yesterday's trading session. But earnings aren't the big story in this $8 billion oil service stock. In fact, the big story comes from a technical setup that's been in the works since all the way back in late October. And right now, the level to watch is $180.
Core Labs is currently forming a descending triangle pattern, a bearish price setup that's formed by down-sloping resistance above shares and horizontal support to the downside at $180. Basically, as shares bounce in between those two technically-important price levels, CLB is getting squeezed closer and closer to a breakdown below support. When that happens, we've got a sell signal in this stock. Shares have been testing that $180 level for the last few sessions, but so far the trade remains in setup mode. It doesn't become a sell (or short) signal until shares can't catch a bid at $180 anymore.
In the meantime, momentum adds some extra confirmation to downside in CLB. The downtrend in 14-day RSI, our momentum gauge, has been intact since October, and it's still very much alive. Since momentum is a leading indicator of price, we're likely to see more selling in CLB.
Automatic Data Processing
We're seeing the exact opposite setup in shares of Automatic Data Processing (ADP) - Get Report this week. ADP spent the last couple of months forming an ascending triangle, a bullish price setup. But shares broke to the downside before the pattern had a chance to trigger a buy (that would have happened on a move through resistance at $82). In many ways, an aborted bullish setup is as bad as -- or even worse than -- an outright bearish one.
And with the breakdown in ADP still fresh, this stock still looks toxic.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Double tops, triangles and other pattern names are a good quick way to explain whats going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That uptrending support level in ADP was a price where there had been an excess of demand of shares; in other words, it was a place where buyers were more eager to step in and buy shares at a lower price than sellers were to sell. Thats what made the breakdown below support so significant -- the move would told us that sellers were finally strong enough to absorb all of the excess demand at that price level. Now's not the time to be a buyer in ADP.
While the last few months have been pretty lackluster for the S&P 500, they've been downright nasty for shares of professional social network LinkedIn (LNKD) . While the big index is only up around 6% since September, LinkedIn is actually down almost 16% over the same timeframe. And the chart suggests that LinkedIn's underperformance isn't ending.
You don't have to be an expert technical analyst to figure out what's going on in LinkedIn -- a quick glance at the chart should do. That's because shares of LNKD are currently forming a downtrending channel, a price setup that's formed by a pair of parallel trend lines that bounding LNKD's share price movement. When it comes to price channels, it's about as simple as it gets: up is good and down is bad.
LinkedIn isn't in crisis mode just yet -- it has some room within the channel to drift higher before we're likely to see a bounce lower again. Even so, resistance has batted shares down on the last five attempts at pushing through that price ceiling, so it's best not to tempt fate. From a technical standpoint, LinkedIn is toxic.
Digital Realty Trust
From a fundamental standpoint, I like Digital Realty Trust (DLR) - Get Report. The stock's 6.25% dividend payout is hefty, and its niche positioning as a datacenter REIT is compelling as demand for cloud services grows. But with DLR showing us the same downtrending channel as the one in LinkedIn, I wouldn't touch this name right now. It's toxic too.
Worse, DLR is currently touching its trendline resistance line this week. That's precisely the worst time to own shares of this $6 billion REIT; not only is upside potential near-zero (shares have already demonstrated that they can't catch a bid above resistance), but downside risk goes all the way to the bottom of the channel. Now's a good time to be short DLR, but that's about it. Opportunistic buyers should wait for shares to break the channel before clicking "buy."
Relative strength has been horrendous in DLR since all the way back in May. With the S&P 500 in corrective mode, relative strength remains the single most important indicator in your trading toolbox. Look for relative strength trends that look like the opposite of DLR's, and you'll avoid toxicity in your portfolio this month.
To see this weeks trades in action, check out the Toxic Stocks for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned. Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji