We're finally at Dow 20,000. All of the big market indices are hitting new all-time highs this week - in short, you could have the worst market timing in the world and still be sitting on gains in 2017.
There's just one problem.
While the big stock market averages are indeed hitting highs, the individual stocks are a different story. As I write, a third of the S&P 500 is down so far this year. Zoom out to the last six months, and this breakneck rally in the big market index boils down to a coin flip; almost half of the stocks in the S&P are down over the last six months. Of those, nearly half are down 10% or more, trailing the broad market in a meaningful way.
The key takeaway here is that while investors may be popping Champagne over the Dow's big milestone this week, there's a good chance those same investors own some stocks that have been toxic performers.
And none of that is changing as we head deeper into 2017.
In the year ahead, simply avoiding the worst-performing stocks could boost your returns far more than picking the very best ones.
So to figure out which stocks you should be avoiding as we close out the year, we're turning to the charts for a technical look at five that could be about to turn "toxic."
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 entry and exit points.
Just so we're clear, the companies I'm talking about today are hardly junk.
By that, I mean they're not next up in line at bankruptcy court - and many of them have very strong businesses. But that's frankly irrelevant to what happens to their stocks; 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.
So, without further ado, let's take a look at five "toxic stocks" to sell - and when to sell them.
First on our list is $25 billion Taiwanese telecom giant Chunghwa Telecom (CHT) - Get Chunghwa Telecom Co., Ltd Sponsored ADR Report. You don't need to be a market wizard to figure out that Chunghwa's been a hard stock to like in recent months - shares of this big ADR are down more than 17% from their peak back in August. The bad news is that a classic continuation pattern is signaling the potential for another leg lower in this stock...
Chunghwa has spent the last couple of months forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares at $31.25, and downtrending resistance to the top-side. Basically, as this stock has bounced in between those predictable technical levels, shares have been getting squeezed closer and closer to a breakdown through our price floor at $31.25. If that breakdown happens, it's a new sell signal in CHT.
CHT's 50-day moving average has been acting like a proxy for the resistance line that forms the top of the descending triangle pattern. Think of it like a barometer for how to trade this stock: don't consider buying until CHT can catch a bid above the 50-day - and it you already own it, a violation of the aforementioned $31.25 level is the signal that it's time to cut your losses on this stock.
General Growth Properties
We're seeing the exact same setup right now in shares of $21 billion retail real estate investment trust General Growth Properties (GGP) . Like CHT, GGP is currently forming a descending triangle after peaking last summer. For this stock, the big breakdown level to watch is support down at $24.50.
What makes that $24.50 level in particular so significant for GGP? It all comes down to buyers and sellers. Price patterns, like this descending triangle, are a good quick way to identify what's going on in the price action, but they're not the actual reason it's tradable. Instead, the "why" comes down to basic supply and demand for shares of the stock itself.
The $24.50 support level in General Growth is a place where there has been an excess of demand for shares since September; in other words, it's a spot where buyers have been more eager to step in and buy shares than sellers have been to take gains. That's what makes a breakdown below $24.50 so significant. The move means that sellers are finally strong enough to absorb all of the excess demand at that price level.
An additional red flag that's showing up on GGP's chart right now is relative strength. Relative strength measures this stock's performance versus the rest of the market - the downtrend in this indicator signals the fact that GGP continues to be a laggard as we head into 2017. As long as that downtrend remains intact, GGP remains predisposed to underperform the rest of the market.
Meanwhile, the last six months have been a great run for shares of cloud services firm Akamai Technologies (AKAM) - Get Akamai Technologies, Inc. Report. Since the end of July, this $12 billion stock is 34% higher than it started, leaving the rest of the tech sector in its dust. But that rally is starting to show some cracks this January - investors might want to think about taking some of those recently-won gains off the table in Akamai. Here's why.
Akamai has spent the last several months forming the early stages of a double top pattern, a bearish continuation setup that looks just like it sounds. The double top is formed by a pair of swing highs that peak at approximately the same price level, separated by a low that marks the line in the sand that signals downside risk ahead. For Akamai, the price level to watch is $63 support - if shares fail to hold above that low from December, look out below.
Price momentum, measured by 14-day RSI in Akamai's chart above, is an extra red flag to pay attention to in this price setup. That's because our momentum gauge rolled over in the fall, making lower highs on the pair of peaks that make up the double top pattern. Momentum is a leading indicator to price, and the lower peaks create bearish confirmation that suggests buying pressure is waning here. If $63 gets violated, look out below.
There isn't a whole lot of nuance on the chart for power generation firm Calpine Corp. (CPN) right now. Instead, the pattern in play here is about as simple as they get - and it's telling investors that it's time to sell...
Calpine has spent much of the last year stuck in a downtrending channel, a pattern formed by a pair of parallel trend lines that have swatted shares of CPN lower on every attempt to break free of them so far. That means, as shares come off their fifth test of trendline resistance this January, it makes sense to be a seller in Calpine. That bounce lower earlier this week is the sell signal investors need to heed.
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 Calpine.
Phillips 66 is another stock that starting to show some warning signs after what's been a pretty respectable rally off of its lows last summer. This stock has been forming a classic bearish reversal setup since early November, and it's in its late stages as I write.
The price setup playing on in shares of Phillips 66 is a head and shoulders top, a bearish reversal pattern that indicates exhaustion among buyers. The pattern is identified by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal triggers when Phillips 66's neckline gets materially violated -- that happens at the $82 price level.
Like with any of the other trades on this list, it's crucial to be reactionary if you decide to act on the PSX chart -- technical analysis is a risk management tool, not a crystal ball. That means this stock doesn't become a high-probability sell until shares actually violate that long-term price floor at $82. Until then, shareholders should keep a close eye on it over the next few trading sessions.
At the time of publication, author had no positions in the stocks mentioned.