BALTIMORE (Stockpickr) -- A year for the record books it isn't. So far, the great big S&P 500 index has managed to move all of 2.4% higher year-to-date, a pretty anemic performance by most measures.
But a more important number might just be 31%. That's the percentage of S&P components that's down 10% or more since January. Despite the relatively flat price stats in 2015, almost a third of the broad market index is actually in double-digit decline right now. In short, the performance numbers don't tell the whole story about what's happening in stocks right now. A big chunk of this market has been "toxic" to your portfolio.
The big question now is which stocks will be toxic in the second half of 2015. To find out, we're taking a technical look at five big "toxic stocks" to avoid this summer.
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 entry and exit points.
So without further ado, let's take a look at five "toxic stocks" you should be unloading.
2015 has been a rough year for shareholders of American Express (AXP) - Get Report. Since the calendar flipped to January, this payment network has seen its share price shredded by more than 18%. But that might just be the first act for AmEx. Shares of this $76 billion financial firm are showing traders a textbook bearish price setup this summer.
American Express has spent the last few months forming a descending triangle pattern, a bearish setup formed by horizontal support down at $76, and downtrending resistance to the top-side. Basically, as shares bounce in between those two technically significant price levels, AmEx has been getting squeezed closer and closer to a breakdown below that $76 support level. Shares finally violated that price floor last week.
Since then, American Express pulled back to $76, and shares have been flirting with that level ever since. That's recent bounce might seem like a good thing -- it's not. Pullbacks aren't uncommon after breakdowns, and they're usually short-lived. Instead, look for another bounce lower as your exit signal for AmEx.
Coincidentally, we're seeing a similar setup in shares of former American Express subsidiary Ameriprise Financial (AMP) - Get Report. Like AmEx, Ameriprise has been under pressure for most of 2015. Also like AmEx, this stock is showing traders a descending triangle setup this summer. The sell signal comes on a breakdown through support at $122.50.
Why all of that significance at that $122.50 level? It all comes down to buyers and sellers. Price patterns, like this descending triangle pattern in Ameriprise, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Ameriprise's stock.
The $122.50 support level is a price where there has been an excess of demand for shares; in other words, it's a spot where buyers have previously been more eager to step in and buy than sellers have been to take gains. That's what makes a breakout below $122.50 so significant – the move means that sellers are finally strong enough to absorb all of the excess demand at that price level. Like with any breakout trade, it's important to be reactionary here; downside in Ameriprise doesn't become a high-probability trade until sellers are able to knock this stock below $122.50.
Houghton Mifflin Harcourt
2015 has been a different story for shareholders of $4 billion learning company Houghton Mifflin Harcourt (HMHC) - Get Report. Shares are actually up 25% this year, posting performance that's left the major market indices in the dust. But that trajectory has been slowing since the start of this summer. More recently, Houghton Mifflin Harcourt has started looking "toppy." Here's when investors should think about taking gains off the table:
Houghton Mifflin Harcourt is forming a pretty textbook 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. The sell signal comes on a violation of the trough that separates those two tops. For Houghton Mifflin that's the $25 support level on the chart.
The price setup in Houghton Mifflin isn't a foregone conclusion just yet. If shares can make new highs above $27, then the double top in this stock gets invalidated. If you're looking for a buying opportunity in Houghton Mifflin, it makes sense to wait and see whether it triggers as a "toxic stock" first with a fall through $25.
It doesn't take an expert trader to figure out what's been happening in shares of Berkshire Hathaway (BRK.A) - Get Report (BRK.B) - Get Report lately. The price setup in this mega-cap stock has been about as simple as they get – shares have been sliding down and to the right in a well-defined price channel. And Berkshire isn't looking any better as we move deeper into the summer months.
The price pattern in Berkshire Hathaway is about as simple as they get. Since last fall, this stock has been bouncing its way lower in a well-defined downtrending channel, swatted down on every test of trendline resistance. Every test of the top of Berkshire's price channel has been a great selling opportunity, and as shares test that level for a fifth time now, it makes sense to sell the next unsuccessful test of resistance.
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 Berkshire Hathaway.
Does all that have any impact on the long-term fundamentals in a value-centric stock like Berkshire? No. But it does mean that shares could get even cheaper in the near-term, and that's something that value investors should be paying attention to if they're looking for buying opportunities in 2015. Until Berkshire Hathaway can make some higher highs, the downtrend is intact.
Cognizant Technology Solutions
Last up on this week's list is $38 billion IT consulting stock Cognizant Technology Solutions (CTSH) - Get Report. Cognizant is another stock that's been in rally-mode for most of 2015, but a classic reversal pattern is signaling the potential for a drop this summer. $59 is the price level to watch out for in August.
Cognizant is currently forming a long-term head and shoulders pattern. The head and shoulders 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 comes on a move through Cognizant's neckline -- that's our $59 price tag.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in Cognizant. Our momentum gauge has been in a downtrend since February, making lower highs on each of the three price peaks in Cognizant's head and shoulders pattern. That's a bearish divergence that indicates buying pressure is weakening. If that $59 level gets violated, then it's time to sell.¿
This article is commentary by an independent contributor. At the time of publication, the author was long BRK.B.