BALTIMORE (Stockpickr) -- The S&P 500 is quickly closing in on the double-digit gains mark this summer, up more that 8% year-to-date as I write. At this pace, the big index is on track to post total returns of 14.8% -- that's especially impressive performance when you factor in last year's breakneck rally.
But a small group of "toxic" stocks could be holding your performance back this year in a big way.
There's an old trite saying that "it's a market of stocks, not a stock market," and that's frankly been the case this year. Almost a third of S&P 500 components are actually down since the calendar flipped to January, meaning that it hasn't been hard to find exposure to a stock that's hurting your portfolio's performance this year.
That's why, today, we're taking a technical look at five toxic stocks you should sell.
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 planning their stock execution.
So, without further ado, let's take a look at five "toxic stocks" you should be unloading.
Up first on our list of toxic name is Lululemon Athletica (LULU) - Get Report , a stock that's been one of the most conspicuous losers of 2014. Year-to-date, LULU's shares have lost more than 31%, frustrating shareholders all the way down. The bad news is that the selling isn't necessarily over in Lululemon. Shares look pointed toward another leg lower in September.
That's because LULU is currently forming a descending triangle pattern, a bearish setup that's formed by horizontal support down at $37.50 and downtrending resistance to the upside. Basically, as LULU bounces in between those two technically-important levels, it's getting squeezed closer to a breakdown below that $37.50 price floor. When that happens, we've got a sell signal in this stock.
Relative strength adds another red flag to the setup in LULU. This stock's relative strength line has been downtrend all year long, an indication that Lululemon is underperforming the rest of the market. As long as that downtrend remains intact, LULU's underperformance should continue.
We're seeing the exact same setup right now in shares of Patterson Companies (PDCO) - Get Report . Like LULU, Patterson is currently forming a descending triangle setup -- the big difference is that this setup is forming a top in the much longer-term in PDCO. The sell signal comes on a breakdown below $38.50. Put simply, if that level gets violated, then it's time to be a seller.
Why all of the significance at $38.50? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns like the descending triangle 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 shares.
That $38.50 level in PDCO 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. So, while PDCO could still have some upside in the near-term and stay within the triangle, it's a name best avoided this summer.
The good news is that you don't have to be an expert technical trader to figure out what's going on in shares of Flir Systems (FLIR) - Get Report right now. The bad news is that this setup looks about as toxic as they get. Even though FLIR has bounced higher since the start of August, investors should look at the move as a better selling opportunity, not a change in this stock's bearish trend.
FLIR has been bouncing its way lower in a textbook downtrending channel since April, swatted lower on each successive test of trend line resistance. That pair of parallel trend lines on FLIR's chart defined the high-probability range for shares to trade within. And since those lines are pointing down and to the right, it makes sense to sell this next bounce down off of resistance. It's really just as simple as that.
Momentum, measured by 14-day RSI, adds some extra context to the downtrend in FLIR. Our momentum gauge has been making lower highs over the course of the channel, an indication that buying pressure is still waning, even now.
New Oriental Education & Technology Group
Mid-cap Chinese education stock New Oriental Education & Technology Group (EDU) - Get Report is set up just like FLIR right now -- only worse. Like FLIR, EDU is bouncing its way lower in a well-defined downtrending channel, but this stock's setup has been much longer-term and it's given back more of its share price. Since the start of 2014, EDU is down more than 27%.
And with shares coming up to test trend line resistance for a sixth time in this channel, it makes sense to sell the next bounce lower.
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 EDU.
Regal Entertainment Group
$3.2 billion cinema operator Regal Entertainment Group (RGC) rounds out our list of toxic stocks this week. Thing is, Regal has actually had a fairly strong run so far in 2014. Since the calendar flipped to January, this theater chain is up 8.4%. But now, shares are starting to look "toppy," and investors should think about taking gain
Regal is forming a double top pattern. The double top looks just like it sounds: It's a bearish reversal trade that's formed by a pair of swing highs that top out at approximately the same price level. The sell signal comes on a violation of the support level that separates the tops, that $19.50 price floor in the case of RGC.
That doesn't mean that lower levels are a foregone conclusion just yet. Since Regal's topping pattern hasn't triggered yet, it has a way out if buyers can muster the strength to propel shares past $21.50. That said, a lack of nearby support before $19.50 and lower highs in RSI are contributing to a picture where that downside is looking increasingly likely.
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 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