A month ago, most investors probably couldn't envision a scenario in which 2016 would turn out to be a positive year for stocks. Bearishness in AAII's US Investor Sentiment survey was practically off the charts earlier this year.
But now, exactly a month off of February's lows, the big S&P 500 index is already within grabbing distance of breakeven for the year. It's been a breakneck rebound -- but the raw stats don't tell the whole story.
You see, while stocks have been "working" again in recent weeks, a big contingent of this market is still awash in red ink in March.
As I write, almost a quarter of the S&P is down 10% or more year-to-date. That means that, despite the strength in stocks of late, a very large corner of this market still looks pretty "toxic" for your portfolio. And avoiding the toxic names could be the best thing you do for your portfolio this year.
To spot the next round of red flags, we're turning to the charts for a technical look at five big-name stocks that could be turning toxic here. 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 on the list is auto parts stock Dana Holding (DAN) - Get Report . It's been an unabashedly awful year for shareholders in Dana. Over the last 12 months, this former mid-cap has lost about 40% of its market value in a selloff that's only recently started to slow down. The bad news for long-suffering shareholders is that this stock could actually be positioned for a second leg lower this spring.
Dana Holding is currently forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares (at $11 in this case) and downtrending resistance to the upside. Basically, as this stock has ricocheted in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakdown below our $11 price floor. If and when that breakdown happens, we've got a new sell signal in Dana.
Relative strength, which measures Dana Holding'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 beginning of last summer, which tells us that this stock is continuing to underperform the rest of the market in the long-term. If $11 gets violated, look out below.
We're seeing the same price setup in shares of mid-cap chemical maker FMC (FMC) - Get Report , albeit in the longer term. FMC has actually been a better-than-average performer in 2016; it's up on the year, as of this writing. But zoom out on the chart, and a descending triangle pattern is showing up in shares. Support at $11 is the line in the sand to watch in shares of FMC.
Why all of the significance at that $33 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle in FMC, 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 shares of the stock itself.
The $33 support level in FMC is a place where there has previously 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 $33 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level.
Keep a close eye on that $33 level as we head deeper into March.
Huntington Ingalls Industries
Things have been pretty good in shares of shipbuilding stock Huntington Ingalls Industries (HII) - Get Report lately. Since shares bottomed back in October, Huntington Ingalls has rallied nearly 26%. But shares are starting to look "toppy" in the long-term, and that means that investors might want to think about taking some of those recent gains off the table.
Huntington Ingalls 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 peak at approximately the same level; the sell signal comes on a violation of the trough that separates those two peaks. For Huntington Ingalls that breakdown level to watch is support down at $120.
Momentum, measured by 14-day RSI in Huntington Ingalls, adds another red flag for shareholders to be aware of here. Our momentum gauge made a pair of lower highs at the same time that HII's price action was testing the $135 resistance level for the second time. That's a bearish divergence that signals buying pressure waning in 2016. So if $120 support gets broken, Huntington Ingalls becomes a sell.
Things have been looking pretty straightforward in shares of agribusiness giant Monsanto (MON) -- and not for the better. Since December, Monsanto has been bouncing its way lower in a well-defined downtrending channel. As shares test the upper range of that downtrend for the fourth time now, it makes sense to be a seller.
Monsanto's downtrend is relatively new, but it's not hard to spot. The price setup is formed by a pair of parallel trendlines that have corralled all of Monsanto's price swings since the calendar flipped to December. Every test of the top of the channel so far has provided shareholders with an optimal selling opportunity before the subsequent leg down -- and Monsanto is testing the top of its channel again this week. It makes sense to sell the next bounce lower.
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 Monsanto.
Last on our list of potentially toxic trades is $28 billion utility PG&E (PCG) - Get Report . PG&E is another big-name stock that's starting to show some cracks after a strong start to 2016. After rallying more than 7% year-to-date, investors might want to think about taking some gains of the table in this big power company.
Since the beginning of February, PG&E has been forming a head and shoulders top, a classic price pattern that signals exhaustion among buyers. It's 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 PG&E's neckline, which is the $55 price level.
There's good reason to pay attention to this pattern in PG&E right now: 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." If PG&E violates $55 in March, it becomes a sell.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.