At a glance, 2016 looks like a solid year for stock market investors. Year-to-date, the big S&P 500 index has climbed 7% higher on a total returns basis, putting it on track to end the year with double-digit gains.
Even better, all of the big U.S. stock indices have posted record high closes this year.
But beneath those headline stats, there's trouble brewing for investors who aren't paying close attention. That's because, while the big market averages hover near their highs, a big chunk of the market isn't participating in the upside. As I write, one in five S&P 500 stocks are actually down 8% or more since the calendar flipped to January.
Put simply, a big contingent of stocks could be toxic for your portfolio's performance as we enter the final stretch of the year. To figure out which stocks to steer clear of, we're turning to the charts today for a technical look at five stocks that could be toxic for your portfolio in the month ahead.
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.
Up first is $7 billion Chinese internet company 58.com (WUBA) - Get Report . This online classifieds stock has been a drag on investors' performance all year long, down 28% since the start of 2016 -- and shares could have even further to fall thanks to a bearish continuation setup that's been forming in shares for most of the year. Here's why.
58.com is currently forming a descending triangle pattern in the long-term. The pattern is formed by horizontal support down below shares at $44, with downtrending resistance to the top-side. Basically, as this stock pinballs in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakdown through that $44 price floor. If and when that price level gets violated, it's time to sell WUBA.
Relative strength, which measures 58.com's price performance vs. the rest of the stock market, adds another red flag to the stock chart. That's because relative strength has been in a downtrend since the end of 2015, signaling that shares are continuing to underperform the S&P 500 right now. If $44 gets busted, this stock could see a lot more downside.
The exact same price setup is showing itself in shares of $23 billion luxury eyewear company Luxottica Group (LUX) . Like 58.com, Luxottica is currently forming a textbook example of a descending triangle setup, in this case with support down at the $47 level. That puts Luxottica a dollar and change away from breakdown territory as of this writing.
What makes that $47 level in particular so significant? It all comes down to buyers and sellers. Price patterns, such as this descending triangle setup in Luxottica, 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 $47 support level in Luxottica is a place where there has been an excess of demand for shares; 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 $47 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level. Keep an eye on that $47 level in the next few trading sessions.
The last several months have actually brought out some strong performance in shares of $83 billion pharmaceutical giant AstraZeneca (AZN) - Get Report . Since shares bottomed in late June, this big drug maker has seen its share price rally 20% higher. The problem is, that rally is starting to show some cracks this fall.
AstraZeneca 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 top out at approximately the same price level -- they're separated by a trough that defines the support level at the bottom of the price pattern. If that support line, $32.50 in AstraZeneca's case, gets violated, it's time to unload shares from your portfolio.
Bear in mind that "if" is the operative word here. Technical analysis is a risk management tool, not a crystal ball. So, like with any of the other trades on our list of stocks today, AstraZeneca doesn't actually become a high-probability downside move until its $32.50 support level gets violated. Until then, it's waving a caution flag. But shares' proximity to $32.50 here puts it in "make or break" territory as we round the corner to October.
Urstadt Biddle Properties
Urstadt Biddle Properties (UBA) - Get Report is another stock that's shown off some market-beating performance in 2016. Since the start of the year, this REIT has managed to make its way 19% higher on a total returns basis, leaving the big market averages in its dust. But that doesn't mean that Urstadt Biddle is a name you want in your portfolio this fall -- quite the contrary, in fact. And you don't need to be an expert technical trader to figure out the warnings on this stock's chart.
Urstadt Biddle is currently in a well-defined downtrend, a price channel formed by a pair of parallel trend lines that have corralled nearly all of this stock's price action since shares peaked at the start of the summer. So far, every test of the top of the channel has given sellers their best opportunity to get out before this stock's subsequent leg lower. As Urstadt Biddle retreats from trend line resistance this week, it makes sense to sell.
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 Urstadt Biddle.
Shinhan Financial Group
Last on our list of potentially toxic trades is $18 billion South Korean banking firm Shinhan Financial Group (SHG) - Get Report . Shinhan Financial has been in rebound-mode in recent months, but after climbing more than 16% off of its summer lows, this stock is starting to look "toppy" thanks to a classic reversal setup. The sell signal comes on a violation of the $35 level.
Shinhan Financial's price pattern is a head and shoulders top, a reversal pattern that signals exhaustion among buyers. The setup 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 comes on a breakdown through Shinhan Financial's neckline, down at the previously mentioned $35 level.
Lest you think that the inverse head and shoulders is too well known to be worth trading, the research suggests otherwise: an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant." That's good reason to keep an eye on how Shinhan handles its next test of $35.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.