Sin is in, apparently.
So-called "sin stocks" are outperforming the rest of the market in a big way in 2016. The USA Mutuals Barrier Fund (VICEX), a sin-stock-focused mutual fund formerly known as the Vice Fund, is up 2.7% since the calendar flipped to January.
If shares kept up that pace all year long, it would be good enough for a nearly 14% rally. Meanwhile, the S&P 500 is still in the red year-to-date.
But things could be about to heat up even more in sin stocks, the nickname given to companies in the alcohol, tobacco, gambling and defense businesses. As I write, some of the biggest sin stocks on the market are edging closer to breakout territory this month. To find the specific sin stocks that look the most primed to rally this spring, we're turning to the charts for a technical look at five to trade for gains.
In case you're unfamiliar with technical analysis, here's the executive summary: 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 planning their stock execution.
Without further ado, here's a rundown of five technical setups that are showing solid upside potential right now.
Leading things off is $119 billion tobacco giant Altria (MO) - Get Altria Group Inc Report . Altria has been a strong performer in 2016, up 7.5% on a total returns basis since the calendar flipped to January. But shares could be headed for a second leg higher in March thanks to a long-term continuation pattern that broke out at the end of February.
Altria has been forming a long-term ascending triangle pattern since last fall. The ascending triangle is formed by a horizontal resistance line up above shares (at $61.50 in Altria's case) and uptrending support to the downside. Basically, as shares have bounced between those two technically significant price levels, this stock has been getting squeezed closer and closer to a breakout above our $61.50 price ceiling.
The breakout finally happened during the final week of February, and since then, a throwback to re-test newfound support at that same $61.50 level is giving traders a second chance at a low-risk entry. From here, it makes sense to buy the next bounce higher in Altria.
Relative strength (not to be confused with RSI at the top of the chart) adds some extra confidence to the upside in Altria right now. That's because our relative strength line is holding its uptrend from the beginning of the year, indicating that this stock is still outperforming the rest of the market long-term. As long as that uptrend in our side-indicator stays intact, Altria should keep on outperforming the rest of the market.
The price action has looked a little bit less directional in shares of large-cap alcoholic beverage company Diageo (DEO) - Get Diageo Plc Report . This spirits distiller has been churning sideways for most of 2016, down about 1% on the year as I write. But zoom out on the chart a bit, and things start to look a lot more bullish for Diageo in March.
Diageo has spent most of 2016 forming a "rounding bottom," a simple reversal pattern that looks just like it sounds. The rounding bottom signals a gradual shift in control of shares from sellers to buyers, and it triggers with a breakout above the resistance level that caps off the pattern. For Diageo, that key price level to watch is $109.
Why all of that significance at the $109 level? It all comes down to buyers and sellers. Price patterns, such as this rounding bottom setup in Diageo, 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 Diageo's shares.
The $109 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $109 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Remember to be reactionary here. Diageo has been in a downtrend since last fall, and this stock isn't a high-probability buy until our $109 line in the sand gets crossed. From there, the next potential stumbling point comes in at Diageo's prior highs at $116.
Smith & Wesson Holding
You don't need to be an expert technical trader to figure out why shares of Smith & Wesson Holding (SWHC) are up 50% in the last six months. The price action in this small-cap firearm maker is about as simple as it gets. Smith & Wesson has been a "buy-the-dips stock" for more than a year now, and as shares test new highs in March, it's time for traders to take aim.
Smith & Wesson has been in a long-term uptrend for more than a year now. That trend is formed by a pair of parallel trendlines that have identified the high probability range for shares since early 2015. Put simply, every test of the bottom of that price channel has provided investors with a high-probability buying opportunity in Smith & Wesson. And as this stock tests the top of its range here, it makes sense to wait for a minor correction to buy the next bounce off of support.
Waiting for that bounce is important for two key reasons: It's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, and you know you're wrong).
Remember, all trend lines do eventually break, but by actually waiting for a bounce to happen first, you're ensuring Smith & Wesson can actually still catch a bid along that line before you put your money on shares. Buyers are still in control of this stock's trajectory in the long-term.
MGM Resorts International
Casino operator MGM Resorts International (MGM) - Get MGM Resorts International Report has been under pressure lately. Since the start of November, MGM has shed about 15% of its market value, underperforming the S&P by a factor of three. But MGM's rout looks like it's coming to an end thanks to a classic reversal pattern that's showing traders a breakout signal in March.
MGM has spent most of 2016 forming an inverse head and shoulders pattern, a technical reversal setup that indicates exhaustion among sellers. You can spot this price pattern by looking for two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal came on a move through MGM's neckline at the $20.50 level.
It's been a smart idea to wait for confirmation before piling into the MGM trade. While the breakout above $20.50 was pretty clear-cut, shares hit their downtrending resistance line (the red dashed line on the chart above) almost immediately, giving that fresh buy signal a major test. If you're looking to buy the breakout in MGM, it makes sense to take a starter position, now that the head and shoulders breakout has been confirmed, and then scale into a full-sized position once shares trade above that red trend line at $21.50.
Anheuser Busch Inbev
Finally, we're seeing the same price setup in shares of international beer brewing giant Anheuser Busch Inbev (BUD) - Get Anheuser-Busch InBev SA/NV Report . Just like MGM, Anheuser Busch Inbev has been forming an inverse head and shoulders pattern, albeit with a couple of exceptions: The price pattern in Anheuser Busch Inbev is shorter-term, and it hasn't broken out yet.
From here, the key price level to watch is Anheuser Busch Inbev's neckline at $119. A breakout above that $119 line in the sand means that buyers are definitively back in control and a test of prior highs at $127.50 becomes likely. Once the breakout happens, prior support at $116 is the spot to park a protective stop.
Lest you think that the inverse head and shoulders is too well known to be worth trading, the research suggests otherwise. An 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 Anheuser Busch Inbev and MGM in March.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.