BALTIMORE (Stockpickr) -- 2014 was another big year for stock investors. By the time the books shut for the year, the big S&P 500 index had managed to claim 11.83% gains. But don't be fooled by the stats here. The price action was far from one-sided last year.
For instance, nearly 30% of the big S&P 500 index closed the year down. And thanks to index weighting, nearly a third of the S&P's rally last year came from just 10 stocks -- or 2% of the companies. Put simply, it's been a whole lot easier to underperform the S&P over the course of the last year than the raw numbers indicate. Contrary to popular belief, the best way to avoid falling into a trap with your portfolio hasn't been to buy the right stocks. Instead, the biggest returns have come from not buying the wrong ones.
So as we head into 2015, we're taking a closer technical look at five "toxic" stocks you should avoid in the New Year.
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.
There's no question that the past year has been tough on hard commodity investors -- and it's been even tougher on the miners that pull those assets out of the ground. Case in point: Newmont Mining (NEM) - Get Newmont Goldcorp Corporation (NEM) Report , the $10 billion gold mining stock. While gold prices have slid a little over 10% in the last six months, Newmont's status as a miner effectively makes it a leveraged bet on gold's moves, spurring a nearly 20% drop in NEM over that same period. The bad news for long-suffering Newmont shareholders is that the downside action might not be over yet.
Newmont is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support (down at $18 in this case), and downtrending resistance to the upside. Basically, as NEM bounced in between those two technically important price levels, it's been getting squeezed closer to a breakdown below our $18 support line. When that happens, we've got our sell signal.
Momentum is the side-indicator to watch in Newmont. 14-day RSI, our momentum gauge, has been making lower highs going back to the start of the summer, an indication that buying pressure is continuing to wane in shares of NEM even now. If $18 gets violated, look out below.
Mid-cap industrial company Woodward (WWD) - Get Woodward, Inc. Report had a pretty mediocre run in 2014. Shares gained 7.4% between the first trade last January and Wednesday's year-ending close. That's not horrific performance by any means, but it is pretty marked underperformance compared to the S&P 500. Thing is, shares are teetering here, and it looks like now's the time to think about taking gains in WWD.
WWD is currently forming a double top pattern, a bearish reversal setup that looks just like it sounds. The double top is formed by a pair of swing highs that peak at approximately the same level. WWD's sell signal comes on a breakdown below the support level that separates the two tops, in this case at $45.50.
Why all of the significance at $45.50? 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 double 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 WWD's shares.
That $45.50 level in Woodward 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. For that reason, any violation of $45.50 means that a whole lot of downside risk just opened up in WWD.
This is a long-term setup with equally long-term trading implications if our $45.50 line in the sand gets violated.
Jacobs Engineering Group
You don't need to be an expert technical trader to figure out what's going on in shares of Jacobs Engineering Group (JEC) - Get Jacobs Engineering Group Inc. (J) Report . This $6 billion professional services stock has been bouncing its way lower in a textbook downtrend for the better part of the last year. Since last January, JEC has bled off more than 27% of its share price, underperforming the broad market pretty dramatically. And as shares test trend line support for the sixth time in this channel, it makes sense to sell (or short) the next bounce lower.
The downtrending channel in JEC has provided traders with a high-probability range for shares to stay stuck within. In other words, every test of resistance has been an extremely high-risk, low-reward outcome. And with shares up at resistance again, the next unsuccessful test of resistance (coinciding with the 50-day moving average) is our sell signal.
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 JEC.
Gaming and Leisure Properties
REITs have been enjoying some excellent strength over the last year, propelled by a buoyant real estate market and interest rates that continue to be weighed down for the foreseeable future. But Gaming and Leisure Properties (GLPI) - Get Gaming and Leisure Properties, Inc. Report has been the exception to the rule. Despite a huge 7% dividend yield, the drag of casino performance this year has translated into a 41% drop in shares.
Importantly, the downside action in this $3.3 billion REIT has been extremely orderly. Just like JEC, shares of GLPI have been bouncing their way lower in a well-defined downtrending channel. Now, as shares come back up to test resistance for a seventh time since last March, it makes sense to sell the next bounce lower.
Relative strength adds another red flag to the setup in GLPI. This stock's relative strength line has been trending lower since the beginning of the last year (just like price), telling us that Gaming and Leisure Properties is underperforming the broad market here in good times and bad ones. As long as the downtrend in relative strength remains intact, GLPI's underperformance should as well.
The fat dividend looks appealing, but I'd recommend avoid this toxic name in January.
Shinhan Financial Group
Last up is Shinhan Financial Group (SHG) - Get Shinhan Financial Group Co., Ltd. Sponsored ADR Report , a name that we first looked at back in the first week of December. At the time, SHG was close to triggering a major sell thanks to a long-term head and shoulders topping setup. Well, shares triggered a sell shortly thereafter with a move through support down at $44. Since then, SHG has dropped approximately 10%.
Now it makes sense to follow up today. That's because SHG's selling may not be over yet. While shares are down double-digits from our neckline level at $44, the minimum-measuring objective for SHG's head and shoulders pattern puts a price target all the way down at $36. That's another 10% downside risk from here.
Short sellers who made a bet against SHG on the $44 break might want to tighten up their stops, but covering the short looks a little premature at this point. Likewise, if you're looking for an opportunity to be a buyer in this falling Korean bank, patience is very much a virtue. The next buying opportunity comes on a successful bounce off of our $36 price floor.
-- Written by Jonas Elmerraji in Baltimore.
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.