Odds are, you've heard the old saying "Sell in May and go away." It's built around the idea that stocks typically underperform during the summer months, and investors are better off selling each year when the calendar rolls over to May, and waiting until the fall to start buying again.
Like most old market sayings, there's something to it. Recent academic research actually shows that, over decades of price data, markets do tend to perform worse during the summer. But not all stocks struggle to work for your portfolio when the weather turns warm. Instead, it's the "toxic" stocks that you should be wary of as we head toward June.
Toxic stocks are the ones that are showing technical cracks. That is, they're lacking buyers at the same time that selling pressure is beginning to show itself. And put simply, they're the stocks you don't want to own right now. And the fact remains that simply not owning the wrong stocks is arguably more important than owning the right ones this summer.
To find the stocks waving red flags here, we're turning to the charts today for a technical look at five big stocks that could be toxic to own.
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.
2016 has been a rough year for shareholders of automaker Toyota Motor (TM) - Get Report . Year-to-date, this $171 billion car stock has lost nearly 17% of its market value, trailing the broad market by a big margin. And while shares actually showed some signs of a rebound as recently as a month ago, Toyota's price chart has rolled over into a bearish price setup in May. Here's how to trade it.
Toyota is currently forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares (at $98 in this case), and downtrending resistance to the top-side. Basically, as Toyota bounces in between those two technically significant price levels, this stock has been getting squeezed closer and closer to a breakdown through our $98 price floor. When that happens, we've got a big sell signal.
It's hard to ignore the macro factors in play in shares of Toyota right now. The recent correction in the dollar has been a challenge for this stock -- the vast majority of sales are ex-Japan, while Toyota reports its earnings in yen. Until those headwinds shift, Toyota is likely to remain under pressure. But if $98 gets violated, traders have a palpable signal that sellers have taken control of this stock.
We're seeing a similar price pattern play out in shares of shipping stock Frontline (FRO) - Get Report . Like Toyota, Frontline is currently forming a descending triangle setup, following a colossal selloff. Shares of Frontline have effectively been halved since last fall. The bad news is that this stock could have even further to fall this summer. The key price level to watch is support down at $7.50.
Why all of the significance at that $7.50 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle setup in Frontline, 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 $7.50 support level in Frontline is a place where there has 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 $7.50 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level. If $7.50 gets materially busted this, then Frontline becomes a sell.
Meanwhile, it's been a great year for shares of small-cap consumer financial services company Green Dot (GDOT) - Get Report . Since the calendar flipped to January, this billion-dollar stock has stomped the rest of the financial sector, rallying more than 34% along the way. But Green Dot's rally is starting to show some cracks in May -- and shares are within grabbing distance of their big breakdown level as of this writing.
Green Dot has spent the last couple of months forming a descending triangle pattern, a bearish reversal setup that's formed by a pair of swing highs that peak at approximately the same price level. The sell signal comes on a breakdown through the trough that separates that pair of peaks. For Green Dot, the breakdown level to watch is $21.50, a price level that got tested earlier this week.
Price momentum is the extra red flag to watch in Green Dot right now. Our momentum gauge, 14-day RSI, made lower highs on each of the two peaks in the double top pattern. That's a bearish divergence from price that signals buyers have been quietly fading in this stock. Remember, like with any technical price pattern, you want to be reactionary with the Green Dot trade - it doesn't become a high-probability sell until shares fail to hold $21.50 support.
Pharma firm Eli Lilly (LLY) - Get Report looks toxic right now -- and you don't need to be an expert technical trader to figure out what's happening here. Instead, the price action is about as simple as it gets.
Lilly has spent the better part of the last year bouncing its way lower in a downtrending channel. The channel is formed by a pair of parallel trendlines that have corralled most of this stock's price action since last June. Every test of the top of the channel so far has provided shareholders with an optimal selling opportunity before the subsequent move lower -- and there's no reason to think that this stock is going to act any differently this time around as it retreats from resistance for a fifth time in May.
That bounce lower is a new sell signal in Eli Lilly.
Waiting for this week's 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 Eli Lilly.
Rounding out the list is Berkshire Hathaway (BRK.B) - Get Report . Berkshire may have posted market-beating returns so far in 2016, but it's starting to look "toppy" as we head into the summer. Now, shares are entering the final stretch of a classic reversal pattern; the price level for Berkshire disciples to watch out for is support down at $140 for B-shares.
Berkshire is currently forming a head and shoulders top, a classic price pattern that signals exhaustion among buyers. The setup 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 Berkshire's neckline at the previously mentioned $140 level.
Momentum is confirming the down-move in Berkshire Hathaway as well. 14-day RSI, our momentum gauge up at the top of this chart, made a series of lower highs on each of this stock's price peaks, signaling that buying pressure is waning in this stock. Remember, like with any of the technical trades on this list, it's critical to be reactionary. Berkshire doesn't become a high-probability sell until shares violate $140. For now, this stock is managing to hold up above that level, but it's something shareholders should be keeping a close eye on this summer.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author was long BRK.B.