The big market indices are edging ever closer to new all-time highs as we head into the summer months, a distinction that could be lulling some investors into a false sense of security in June.
Sure, the big market indices may be hovering around their high water mark this month, but not all stocks are participating in that upside. For instance, even though the S&P 500 is hitting its highest levels for 2016 this week, more than a third of S&P components are still down this year.
Many of those laggards are down a lot. Simply not owning those "toxic" stocks likely has more to do with posting positive performance in the second half of 2016 than owning the best performers.
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.
Up first is $16 billion Japanese financial services firm Nomura Holdings(NMR) - Get Report . Nomura has been a rough performer in 2016, down more than 27% since the calendar flipped to January. The problem is, that performance actually looks tame compared with how this stock has been performing longer-term. And the selloff might not yet be over, thanks to a bearish continuation that's been forming for most of this year.
Nomura has been forming a descending triangle, bearish setup formed by horizontal support down below shares at $4, and downtrending resistance to the upside. Basically, as shares bounce in between those two technically important price levels, this stock has been getting squeezed closer and closer to a breakdown through our $4 price floor. When that line in the sand gets violated, it's time to be a seller.
There's an extra red flag showing up on Nomura's chart: relative strength. Relative strength, the line down at the bottom of Nomura's price chart, measures this stock's price performance versus the rest of the stock market. Nomura's relative strength line has been in a downtrend since last summer, signaling that this stock is continuing to underperform the rest of the market long-term. If $4 gets broken, you don't want to own it anymore.
We're seeing the exact same price pattern in shares of a U.S.-based financial firm: WisdomTree Investments(WETF) - Get Report . Like Nomura, WisdomTree has spent most of 2016 forming a textbook descending triangle pattern, in this case with a support level down at $10. Shares are moving down to re-test that $10 price tag for the fourth time since February.
Why all of the significance at that $10 level? It all comes down to buyers and sellers. Price patterns, like this descending triangle setup in WisdomTree, 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 $10 support level in WisdomTree 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 $10 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level.
Meanwhile, Brazilian bank Itau Unibanco(ITUB) - Get Report is another stock that's starting to look toxic in June -- albeit for totally different reasons. Itau Unibanco has actually posted some solid performance so far in 2016, up more than 37% since the beginning of the year. But that recent round of outperformance is starting to show some cracks now, and it might be time to take some gains off the table.
Itau Unibanco is currently forming a rounding top, a bearish reversal pattern that looks just like it sounds. The rounding top signals a gradual shift in control of shares from buyers to sellers. The key sell level to watch in this stock is $8, the support level that's acted like a floor for shares since this pattern started forming back in March.
Put simply, if $8 gets violated, then we've got an indication that sellers have regained control of this stock. A break of $8 also puts shares back on course for a retest of prior support down at $5.50. Remember to be reactionary with this trade (or any of the other bearish setups we're looking at today). ITUB doesn't become a high probability sell until shares fail at the $8 level.
It doesn't take an expert technical trader to figure out what's been going on in shares of Foot Locker(FL) - Get Report lately. Since last fall, this $7.6 billion athletic apparel retailer has been in a well-defined downtrend, selling its way more than 25% lower in the process. And as shares start to rebound off the bottom of their price channel, it's important not to get lured into buying this stock.
Foot Locker's downtrend is about as simple as price patterns get. The setup is formed by a pair of parallel trend lines that have corralled 99% of this stock's price action since last August. Every touch of the top of Foot Locker's price channel has resulted in shares getting swatted lower -- and there's reason to expect FL to react the same way the next time it moves back up to that level.
If you already own Foot Locker, it does make sense to give shares a chance to "correct" back up to resistance around $62 before selling, but as long as the downtrend remains intact, you don't want to hold it any longer than you have to. A stock that's down more than 14% as the S&P hits new year-to-date highs is sending an important message.
Last up on our list of potentially toxic trades is $84 billion European telco Vodafone(VOD) - Get Report . Vodafone is another stock that's showing some cracks after a decent rebound in recent months - shares are up more than 10% since the found a bottom back in February. But now, a classic "topping" pattern is signaling that Vodafone could give back some of those recent gains.
Vodafone is currently forming an inverse head and shoulders pattern, a bearish reversal pattern that indicates exhaustion among buyers. The 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 Vodafone's neckline at $32.
The price setup in Vodafone is overall pretty short-term in nature, and that would typically mean that it comes with equally short-term trading implications. The difference here is that a breakdown below $32 would also coincide with a violation of this stock's longer-term uptrend from its February lows. That's an extra reason to pay attention to what's happening here as Vodafone teeters on the edge of that big price level in June.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.