1.99%: That's how much the big S&P 500 index has managed to pay out in the last 10 months and change since the calendar flipped to 2015. No, it's not exactly a breakneck performance for the stock market, but it's not for a lack of trying.
Many big-name stocks have actually been rallying pretty hard year-to-date. Big tech firms Netflix(NFLX) - Get Report and Amazon.com(AMZN) - Get Report have each more than doubled this year. Even less exciting blue-chip companies such as Kraft Foods (KRFT) and Reynolds American (RAI) are up 40.7% and 43%, respectively, so far in 2015. So this year's weak performance doesn't mean that all stocks are looking anemic, but most S&P components are indeed down on the year right now -- many by as much as the biggest winners are up.
And some look downright "toxic" in the final stretch of this year.
Today, we're turning to the charts to figure out which big stocks to avoid now -- and what price triggers need to get broken for them to go from red flags to outright toxic trades.
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" to sell.
National Oilwell Varco
Up first on our list is National Oilwell Varco(NOV) - Get Report . It shouldn't come as a big surprise that almost any stock in the energy sector has been in "selloff mode" this year -- or that National-Oilwell Varco is down more than 39% in 2015 specifically. What's more concerning is the fact that, while some energy stocks are starting to show signs of a potential reversal, this $15 billion drilling equipment maker actually looks likely to keep moving down from here.
National Oilwell Varco is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support down below shares at $35, and downtrending resistance to the upside. Basically, as shares of NOV bounce in between those two key price levels, shares have been getting squeezed closer and closer to a breakdown below our $35 price floor. If that key support level gets violated, then look out below.
Relative strength, which measures National-Oilwell Varco's price performance versus the broad market, is an extra red flag to watch here. Our relative strength line is holding onto its long-term downtrend, which tells us that this stock continues to underperform the rest of the market in November. If $35 gets busted, then a whole lot of downside risk suddenly opens up in shares of NOV.
We're seeing the exact same setup in shares of gun maker Sturm Ruger(RGR) - Get Report this week -- the big difference here is that Ruger's downside move has already triggered thanks to yesterday's nearly 10% price plummet on earnings news. Like NOV, Ruger has been forming a descending triangle of its own for the last few months. For Ruger, the big breakdown level to watch has been support at $55 -- that level got pretty clearly crushed with yesterday's selling. From here, it makes sense to avoid Ruger on the way down.
Why all of the significance at that $55 level? It all comes down to buyers and sellers. Price patterns, like this descending triangle pattern in Ruger, 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 Ruger's shares.
The $55 support level is a price where there had been an excess of demand for shares; in other words, it's a spot where buyers were previously been more eager to step in and buy than sellers were to take gains. That's what makes this week's breakdown below $55 so significant -- the move means that sellers are finally strong enough to absorb all of the excess demand at that price level. Ruger's been a strong performer this year, but with $55 in the rearview mirror, shareholders should think about taking their gains here.
Dr. Reddy's Laboratories
Pharmaceutical company Dr. Reddy's Laboratories(RDY) - Get Report is another big stock that's actually performed quite well in 2015. Since the start of the year, this drug maker has rallied more than 29%, leaving the rest of the broad market in its dust. But the rally in Dr. Reddy's is starting to show some cracks this fall; here's how to trade it…
Dr. Reddy's Labs is currently forming a double top pattern, a bearish reversal setup that looks just like it sounds. The double top in shares is formed by a pair of swing highs that peak at approximately the same price level – the sell signal comes on a violation of the trough that separates those two price highs. For Dr. Reddy's, that's support down at $60.
The side-indicator to watch right now in Palo Alto Networks is momentum. Our momentum gauge, 14-day RSI, has been rolling over, making lower highs on the price action's pair of peaks. That's an indication that down days are outpacing up days in this stock. If $60 gets broken, then this serial outperformer becomes a sell.
Air Products & Chemicals
Good news: You don't need to be an expert technical trader to figure out what's been going on in shares of $30 billion chemical maker Air Products & Chemicals(APD) - Get Report right now. This price pattern is about as straightforward as they get. The bad news is that shares look likely to keep selling off this month.
Air Products has been bouncing its way lower in a well-defined downtrending channel since February. The firm's downtrend is formed by a pair of parallel trendlines that identify the high-probability range for shares of this stock to remain stuck within. Every test of the top of this stock's price channel has been a great selling opportunity so far, and shares are tracking back down the channel after their most recent failed test of resistance at the end of October. Now, it makes sense to sell this bounce.
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 Air Products.
Last up on our list of potentially toxic trades is $33 billion Italian fashion eyewear company Luxottica Group (LUX) . Year-to-date, Luxottica's price performance has actually been quite good -- shares have rallied more than 26% from the beginning of the year to today. But that rally may have run its course now, and a classic reversal pattern is getting close to triggering this month in Luxottica.
Luxottica is currently forming a head and shoulders top, a bearish reversal pattern that signals 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 Luxottica's neckline -- that's at the $64 price tag. If $64 gets violated, then this stock opens up considerable downside risk.
Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent 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 a good reason to keep a close eye on Luxottica's $64 level here.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author had no positions in stocks mentioned.