Editors' pick: Originally published Jan. 8.
This week hasn't done investors any favors. Just four trading sessions into 2016, and the big S&P 500 index is already down almost 4%. That's the worst start for the stock market since 1991.
454 of the individual stocks in the S&P 500 are down year-to-date. That's not a pretty picture. But the worst performers are showing investors a whole different level of underperformance right now. One in 10 S&P components in the red this year is actually down 8% or more. Put simply, a big chunk of the market looks downright toxic for your portfolio's performance in 2016.
To identify the stocks you don't want to own right now, we're turning to the charts for a technical look at five big-name stocks that are starting to look 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.
If 2016 has been a tough year for the stock market, it's been a downright miserable one for shareholders of Tenet Healthcare (THC) - Get Report . Since Monday, this mid-cap health care facility operator has lost about 16% of its market value. The bad news is that the selling could get even stronger in January. Here's why.
Tenet has spent the last few months forming a textbook descending triangle pattern, a bearish price setup that's formed by horizontal support down below shares (at $27.50 in this case), and downtrending resistance to the topside. Basically, as shares have bounced in between those two technically-significant price levels, they've been getting squeezed closer and closer to a breakdown through our $27.50 price floor. When that level gets violated, it's time to sell -- and shares showed us a confirmed break in yesterday's session. A whole lot more downside risk just opened up.
Relative strength, which measures Tenet Healthcare's price performance versus the broad market, is an extra red flag to watch here. Our relative strength line is still holding onto its downtrend from the middle of the summer, which tells us that this stock is still underperforming the rest of the market in the long-term. If you own shares of Tenet, yesterday's breakdown is your sell signal.
Things have been looking better for shares of $9 billion precision instrument manufacturer Mettler-Toledo International (MTD) - Get Report . Since shares bottomed back in late September, this stock has managed to climb almost 15% higher, leaving the rest of the broad market in its dust. But if you own this stock, you might want to think about taking some of those gains off the table. Mettler-Toledo's rally is showing some cracks in January.
Back in November, Mettler-Toledo started forming a double top, a bearish reversal pattern that looks just like it sounds. The double top is formed by a pair of highs that top out at approximately the same price level. The sell signal comes on a breakdown below the trough that separates those two peaks; for Mettler-Toledo, that breakdown happened on Wednesday, when support at $330 got busted.
While Mettler-Toledo is likely to see a bit of a bounce today, following two pretty large days of selling, it's a mistake to think of it as a buying opportunity. Shares could fall much further from here. At this point, $300 looks like the next meaningful semblance of support for Mettler-Toledo on the way down.
The past few months have been tough for drugstore giant CVS Health (CVS) - Get Report . Since August, this big $105 billion stock has lost more than 16% of its market value. The thing is, that double-digit decline could just be the start of CVS' downtrend right now. Shares are pointing lower as the calendar flips to 2016, and you don't need to be an expert technical trader to figure out why.
Since the middle of the summer, CVS has been stuck in a well-defined downtrend, bouncing its way lower every time shares tried to muster some strength. Every test of the top of this stock's price channel has been a great selling opportunity so far, and that makes any near-term move higher in this stock look suspect. In January, shares are ricocheting off of trendline resistance for a third time; with that bounce in place, look out below as CVS moves back towards the bottom of its price range.
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 contrarians will 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 CVS.
$74 billion insurance giant AIG (AIG) - Get Report looks "toppy" this winter. That's problematic for shareholders, considering the fact that AIG hasn't actually experienced much in the way of upside lately. In the last 12 months, this financial sector giant has shed about 6% of its market value, slightly underperforming the S&P 500 along that stretch of time.
Now, though, a classic bearish price pattern in shares is signaling a potential retest of AIG's prior highs. Since late October, AIG has been forming a textbook head and shoulders top, a reversal pattern that indicates exhaustion among buyers. 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 AIG's neckline, which is currently at the $58 price level.
Price momentum is an extra red flag to watch in AIG right now. Our momentum gauge, 14-day RSI, has been in a downtrend since this pattern started forming. That's a bearish divergence from price that signals buyers have been quietly fading in shares of AIG since the fall. If $58 gets violated, then it's time to be a seller.
We're seeing the exact same price setup in shares of Vertex Pharmaceuticals (VRTX) - Get Report right now. Like AIG, Vertex has been forming a textbook head and shoulders pattern, signaling a potential breakdown in shares. For this $30 billion biotech stock, the big breakdown level to watch is $115.
Why all of the significance at that $115 level? It all comes down to buyers and sellers. Price patterns, like this head and shoulders top in Vertex, 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 Vertex's shares.
The $115 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 been previously been more eager to step in and buy than sellers are to take gains. That's what makes a breakdown below $115 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level. If $115 gets violated, look out below.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.