It's easy to get caught up with the Christmas spirit right now, especially as the Dow flirts with cracking the big, psychologically important 20,000 level. But not all of the stocks in your portfolio are set to leave gifts under your tree in the weeks ahead.
Most investors probably don't realize it at this point, but 2016 hasn't been a layup in terms of investment performance. While the S&P 500 is up more than 13% on a total returns basis since the start of the calendar year, almost one-in-three S&P components are actually down over that timeframe.
That's some pretty toxic underperformance from some of the biggest stocks on the market. And, in some cases, it's just the start.
As I write, a handful of big stocks are showing cracks. Even if the broad market averages keep on chugging higher in 2017, owning these laggards could be hazardous to your portfolio's health. To figure out which stocks to avoid, we're turning to the charts for a technical look at five stocks that are likely to underperform near-term as we turn the corner to 2017.
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.
Up first on the list of potentially toxic trades is $17 billion IT service provider Wipro (WIT) - Get Report. Wipro has been a hard stock to like all year long, shedding more than 17% of its market value since the start of 2016. That's nearly 30% underperformance versus the S&P 500 for anybody keeping score. The bad news is that shares could have even lower to go from here.
Wipro is currently forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares at $9.25, and downtrending resistance to the upside. Basically, as Wipro pinballs in between those two price levels, shares have been getting squeezed closer and closer to a breakdown through that $9.25 price floor. When that happens, we've got a sell signal.
Relative strength, which measures Wipro's performance versus the rest of the broad market, has been an extra piece of evidence against this stock in recent months. Not surprisingly, WIT's relative strength line has been in a downtrend of its own for most of 2016, making this stock statistically likely to underperform the S&P going forward. If WIT slides below $9.25, we've got a new sell signal in this stock.
We're seeing the exact same price setup in shares of online travel site TripAdvisor Inc. (TRIP) - Get Report. That's not an industry thing -- big peer Priceline Group (PCLN) is actually on the verge of breakout territory right now. Meanwhile, TripAdvisor has been a major laggard in 2016, almost cut in half since January.
For TripAdvisor, the big breakdown level to watch is support at $46.
What makes that $46 level in particular so significant? It all comes down to buyers and sellers. Price patterns, like this descending triangle setup in TripAdvisor, 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 $46 support level in TripAdvisor is a place where there has been an excess of demand for shares this month; 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 $46 so significant. The move means that sellers are finally strong enough to absorb all of the excess demand at that price level. If TRIP trades below $46, it's a sell. Shares are balancing just above that level as I write.
Liberty Global LiLAC
It doesn't get much more straightforward than what we're seeing now in shares of Liberty Global LiLAC (LILA) - Get Report, a tracking stock for Liberty Global's operations in Latin America and the Caribbean. Since the start of the year, LILA has shed about 45% of its market value -- and more recently, since peaking in May, shares have been swatted lower in a very well defined downtrend. The trend in LILA is about as simple as technical setups get.
LILA's downtrend is formed by a pair of parallel trendlines that have defined the high-probability range for shares to stay stuck within over the last six months. So far, every time this stock has touched the top of its price channel, shares have gotten batted lower. And as LILA moves toward that level for a fifth time, it makes sense to sell the next bounce lower.
Waiting for this week's 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 LILA.
A good example of a trend reversal is $45 billion Brazilian commercial bank Banco Bradesco (BBD) - Get Report. This stock has actually been a fantastic performer in 2016, rallying more than 67% since the start of the year in a well-defined uptrend, the bullish opposite of the downside trade we just looked at in LILA.
But that all changed in early November, when Banco Bradesco violated its uptrend, signaling an end to the range-bound rally that's been in force since March. Now, with that support line busted, shares are opening up considerably more downside risk. Put simply, the fact that BBD violated support in November provided a pretty clear-cut sell signal in shares. And the fact that shares have mostly managed to tread water since is giving investors a prolonged opportunity to take some gains off the table before shares test lower levels.
From here, the next meaningful support level for shares comes in at $7, a price level that was last tested back in the summer. That's about a 13% downside risk from where shares currently sit. Caveat emptor.
Last on our list of potentially toxic stocks is cloud software company ServiceNow (NOW) - Get Report. ServiceNow has actually been looking bullish lately, signaling a breakout buy signal as recently as September that resulted in a 16% rally. But that upside has run its course, and ServiceNow is starting to look "toppy" this winter.
ServiceNow has spent the last several months forming a head and shoulders top, a bearish reversal pattern that indicates exhaustion among buyers. The pattern is formed 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 ServiceNow's neckline gets materially violated -- that happens at the $72.50 price level.
The head and shoulders top in ServiceNow has been a long-term price setup, and that means it also comes with long-term trading implications when and if that $72.50 level gets violated. The fact that ServiceNow was so technically obedient back in September when it broke out means that investors should heed the sell signal we're seeing now just as closely.
At the time of publication, author had no positions in the stocks mentioned.