Don't get fooled into the fantasy that 2015 has mostly been a sideways year for stocks. While it's certainly been a sideways year for the big market indices -- the S&P 500 is currently 1.1% higher than it started on Jan. 1, for instance – there's been a different story brewing when you zoom down to the individual names on the market.
For example 282 of the stocks in the S&P are down year-to-date. Of those, most are down materially. A full 34% of S&P components are down 10% or more in 2015. There's an important message there: While a similar-sized chunk of the S&P is performing pretty well right now, a meaningful chunk of the market is downright toxic to own this fall.
To find out which toxic stocks to avoid for the rest of the year, we're turning to the charts for a technical take on which issues are waving warning flags.
Just to be 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.
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.
Up first is Williams (WMB) - Get Report , a stock that's been a good example of a toxic name so far this year. Since the calendar flipped to January, Williams has shed more than 15% of its market value, putting it in the bottom quartile of S&P 500 component performance along with many of its energy sector compatriots. But Williams looks like lower ground could be ahead in the final stretch of 2015.
Williams Companies is currently forming a descending triangle, a bearish continuation pattern that's formed by a horizontal support line down below shares (in this case at $35), and downtrending resistance to the top-side. Basically, as Williams bounces in between those two technically important price levels, it's been getting squeezed closer and closer to a breakdown through that $35 price floor. If that $35 line in the sand gets violated, then look out below.
Relative strength, which measures Williams' 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 you own this stock right now, it makes sense to keep a very close eye on $35 support.
We're seeing the exact same price setup right now in shares of mid-cap mortgage insurer MGIC Investment (MTG) - Get Report . Since shares peaked back in July, MGIC has been selling off, down nearly 20% from its high water mark this summer. Now support at $9 is the line in the sand to watch in MGIC's descending triangle setup.
Why all of the significance at that $9 level? It all comes down to buyers and sellers. Price patterns such as this descending triangle pattern in MTIG Investment 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 its shares.
The $9 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 $9 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level. TA breakdown through $9 would be a major sell signal in MGIC this fall.
Meanwhile, 2015 has actually been a stellar year for shareholders of video game company Electronic Arts (EA) - Get Report . Since the beginning of this year, EA has managed to rally more than 50%, making it one of the top-ten performers in the S&P. But this stock is starting to show some cracks -- and investors should start thinking about their exit strategies this fall.
Electronic Arts 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 EA, that's support down at $65.
The side-indicator to watch right now in Electronic Arts 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 $65 gets broken, then this outperformer becomes a sell.
This week's earnings-fueled selling in Target (TGT) - Get Report shouldn't come as a huge surprise to investors. This retailer has spent most of 2015 moving lower. It doesn't take an expert technical trader to figure out what's happening with this stock's trajectory at this point, either. Target is stuck in the same downtrending channel that it entered at the beginning of this summer, and from here, it makes sense to be a seller.
Target has been bouncing its way lower in a simple downtrending channel since June. 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 the next bounce off of trend line resistance looks like the best opportunity for shareholders to get out.
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 Target.
Sunoco Logistics Partners
We'll end things like we started: with a bearish energy sector setup. Shares of Sonoco Logistics Partners (SXL) have shed almost 30% of their market value so far this year, and while shares have actually managed to move higher off of their late-September lows, the downtrend looks more likely to resume this fall. Here's how to trade it:
Sunoco Logistics is currently forming a symmetrical triangle, or "coil" pattern, a setup that's formed by a pair of converging trend lines. Consolidation patterns such as the symmetrical triangle are common after big moves -- they give investors a chance to catch their breath and figure out their next step. Typically, the symmetrical triangle is a continuation pattern; that means that it usually resolves in the same direction that it started. For Sunoco Logistics, that direction is down. Like any technical setup, this price pattern is reactionary, which means that it doesn't become a high-probability trade until the bottom of the pattern gets violated. For Sunoco Logistics, support is currently at the $27 level.
Finally, the constricting action of Sunoco Logistics' symmetrical triangle is setting shares up for a volatility squeeze. Since volatility is cyclical, periods of very low volatility are typically followed up by a swing to high volatility. So, as SXL's price range tightens within in the symmetrical triangle pattern, shares are likely to see any downside moves happen fast. Caveat emptor.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.