U.S. markets are clawing their way back to breakeven again this week. On a total returns basis, the big S&P 500 is only 4.5% lower than it started, less than half the red ink that the big index was showing just a few short weeks ago.
But that stat doesn't really tell the whole story for stocks right now.
While the broad market has been narrowing its losses this month, almost a third of S&P components are still down 10% or more since the start of January. That's a pretty huge chunk of the market that's down double-digits right now. Worse, plenty of stocks that have held up alright in 2016 are starting to show cracks at the exact same time that the S&P 500 has been righting itself.
Put simply, some stocks still look "toxic" right now -- and avoiding them could be the best thing you do for your portfolio this year…
To do that, 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 our list is Latin American telco giant America Movil (AMX) - Get Report . America Movil isn't threatening to turn toxic right now -- it's already been toxic for investors' portfolios over the long term. In the last 12 months, this $45 billion communications stock has lost almost 40% of its market value. The bad news for shareholders is that America Movil could have even further to fall from here.
America Movil has spent the last few months forming a textbook descending triangle pattern, a bearish price setup that's formed by horizontal support below shares (down at $12 in this case) and downtrending resistance to the upside. Basically, as shares of America Movil have bounced in between those two technically significant price levels, this stock has been getting squeezed closer and closer to a breakdown through its $12 price floor. When that breakdown happens, we've got our sell signal.
Relative strength, which measures America Movil'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 still underperforming the rest of the market in the long-term. If $12 gets violated, look out below.
New Senior Investment Group
We're seeing the exact same price setup in shares of small-cap senior housing REIT New Senior Investment Group (SNR) - Get Report . Like America Movil, this stock has been selling off hard for the last year, and shares are showing traders a textbook descending triangle pattern from here. In New Senior Investment Group, the next sell signal comes on a breakdown below support at $8.50.
Why all of the significance at that $8.50 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle in New Senior Investment Group, 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 $8.50 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 previously been more eager to step in and buy shares than sellers have been to take gains. That's what makes a breakdown below $8.50 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 $8.50 level as we head into March.
Meanwhile, things have actually been looking good in shares of $20 billion discount retailer Dollar Tree (DLTR) - Get Report lately. Year-to-date, this store chain has seen its stock price rise 6.6% -- and shares are up about 30% if you zoom out to their mid-November lows. But Dollar Tree's rally is starting to show some cracks right now, signaling that investors might want to think about taking some gains off the table soon.
Dollar Tree is currently forming a broadening top pattern, a pretty rare bearish reversal indicator. As the name suggests, the broadening top is formed by broadening, or diverging, trendlines. In a nutshell, it indicates growing price volatility, a phenomenon that's linked to correcting markets. So even though Dollar Tree has been moving higher for the last handful of sessions, that volatile bounce isn't a particularly bullish sign. The official sell signal comes on a break through the bottom of the pattern, but it's best avoided in the interim as well. Shares can conceivably move much lower and still stay within the price pattern.
On the flip side, if Dollar Tree doesn't bounce lower here, and instead can clear long-term resistance up at $83 in the next few sessions, the topping pattern gets invalidated. Either way, it's a very good idea to keep a close eye on how this pattern plays out in the next couple of weeks.
It doesn't take an expert technical trader to figure out what's been going on in shares of Swedish communications technology stock Ericsson (ERIC) - Get Report lately. This chart has been pointing down and to the right since early last year -- and as shares press against the top of their downtrend this week, now looks like another opportunity to sell before the next drop.
Ericsson has been bouncing its way lower in a well-defined downtrend, bouncing in between a pair of parallel trend lines that have marked the high-probability range for shares to stay within. Those seven previous tests of resistance have provided pretty predictable selling opportunities for shares of Ericsson all the way down. If you're looking for a chance to get out on test number eight, it makes sense to wait for the next bounce lower before you sell.
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 Ericsson.
Last up on our list of potentially toxic trades is India-based IT consulting practice Infosys (INFY) - Get Report . Infosys has mostly churned sideways in 2016, ricocheting in a wide range since last fall, in fact. But that sideways range is actually setting up the basis for a possible breakdown in the near term.
Since mid-November, Infosys has been forming a head and shoulders top, a bearish price pattern that signals 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 Infosys' neckline, which is the $16 price level.
The head and shoulders pattern in Infosys isn't quite textbook; typically the pattern pops up at the top of an uptrend, not after a correction like the one that led up to last November. But, textbook or not, the trading implications are exactly the same if this stock's $16 level gets violated. From there, the next-closest possible support level is down at $15.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.