BALTIMORE (Stockpickr) -- What goes up must come down – with stocks pressing up against new all-time highs once again this week, that's an adage that's weighing on investors' minds as we head into 2015.
All told, the big S&P 500 index has climbed 12.1% since the calendar flipped to 2014 -- and approximately one in four trading sessions has ended with a record high for the big index. That's quite the feat. But as I've said repeatedly over the course of this year, unlike 2013, there's a very big chunk of this market that's failing to perform. If you own one of these "toxic" stocks, you could be putting cement shoes on your portfolio.
With the new year fast approaching, it's time to get your portfolio set for 2015. That's why, today, we're taking a closer technical look at five stocks to sell in December.
Just to be clear, 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, sellers are shoving around these toxic stocks 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 in the weeks and months ahead. 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
So, without further ado, let's take a look at five toxic stocks you should be unloading.
MSC Industrial Direct
Up first is MSC Industrial Direct (MSM) - Get Report , a stock that's been in selloff mode for the past six months. From the end of June to today, MSM has dropped more than 15%, and it's underperformed the S&P by nearly 20%. But the selling may not be over just yet. A bearish continuation pattern in shares of MSM points to even more downside ahead in December.
MSM is currently forming a descending triangle pattern, a continuation setup that's formed by horizontal support below shares at $77 and downtrending resistance to the upside. Basically, as MSM bounces in between those two technically-significant price levels, it's been getting squeezed closer to a breakdown below our near-term price floor at $77. When that $77 level gets violated, we've got our sell signal.
The 50-day moving average has been a pretty good proxy for resistance over the course of the descending triangle in MSM. If you decide to short the $77 break in this stock, then it's a logical place to keep a protective stop above.
$20 billion Latin American TV broadcasting company Groupo Televisa (TV) - Get Report has actually seen a very good run in 2014. Shares have rallied more than 20% since January, stomping the rest of the market, and other foreign stocks in particular. But shares of TV are starting to look "toppy" as we head nearer to year-end. Here's how to trade it.
TV is currently forming a long-term double top pattern, a price setup that looks just like it sounds. The double top is formed by a pair of swing highs that top out at approximately the same price level – the sell signal comes on a breakdown below the support level that separates those two peaks. For Grupo Televisa, that sell signal comes in at $33.
Momentum is the side-indicator to watch in TV. 14-day RSI, our momentum gauge, has been slowly bleeding lower, even as this stock's price has been moving higher. That's an indication that buying pressure is starting to wane long-term in TV. If $33 gets taken out, this stock is a sell.
You don't have to be an expert technical trader to figure out why you didn't want to own shares of $43 billion Swiss banking stock Credit Suisse (CS) - Get Report . This Eurozone financial play has been bleeding all year long, down 14% over the trailing 11 months. But what's important is the fact that the price action in CS has been incredibly well-contained. That's what makes the downtrend tradable here.
Credit Suisse has been bouncing its way lower in a well-defined downtrending channel, a trading channel that's marked the high-probability range for shares to stay within. Put another way, every test of trend line resistance has been a very good opportunity to sell this stock before the next reversal lower. So with shares pressing up against resistance for an eighth time over the course of this channel, it makes sense to sell the next bounce lower.
For shorts, prior resistance at $27.50 is a logical place to keep a stop loss.
Shareholders of the new Eastman Kodak (KODK) - Get Report can't seem to catch a break. That's because, just months after emerging from bankruptcy and re-entering the public markets, this iconic imaging technology company saw its stock enter a prolonged, well-defined downtrend. Just like with Credit Suisse, it makes sense to sell Kodak's next bounce off of the top of its downtrend.
Waiting for that bounce lower before clicking "sell" is a critical part of risk management for two big reasons: it's the spot where prices are the highest within the channel, and alternatively it's the spot where you'll get the first indication that the downtrend is ending. Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're confirming that sellers are still in control before you unload shares of KODK.
Relative strength adds another red flag to the setup in Eastman Kodak. This stock's relative strength line is trending down just like its price, which means that KODK is underperforming the broad market here. As long as the downtrend in relative strength remains intact, Kodak's underperformance should continue.
Shinhan Financial Group
Last up is Shinhan Financial Group (SHG) - Get Report , a South Korean financial services name that's seen its stock all over the place in 2014. Long-term, the prognosis looks bearish in SHG. This stock is forming a classic head and shoulders top, and shares are edging perilously close to their $44 breakdown level this week.
Why all of the significance at $44? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns such as the head and shoulders top are a good way to quickly describe what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for SHG's shares.
That $44 level in Shinhan Financial is the spot where there's previously been an excess of demand for shares; in other words, it's a price where buyers have been more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes a breakdown below support so significant. The move means that sellers are finally strong enough to absorb all of the excess demand at the at price level.
If $44 gets violated here, look out below. This is a long-term pattern, and that means that it comes with long-term trading implications if support gets broken.
To see this week's trades in action, check out the Toxic Stocks 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 that 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
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in
Investor's Business Daily
. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation. Follow Jonas on Twitter @JonasElmerraji.