Thursday's session brought a welcome bounce for U.S. market participants. That 1.7% rebound in the S&P 500 was best trading session so far in 2016, which is frankly a pretty low bar for Mr. Market to jump.
Even so, it's important not to fall into the tempting trap of using Thursday's bounce as an excuse to hold onto stocks that you should really be selling.
I'm not saying that it's time to sell everything – quite the contrary. Yesterday's big bounce in the S&P comes at the exact same time that the big index was testing a critical, long-term support level. But what I am saying is that a small chunk of the broad market is looking "toxic" right now -- and those are the ones that you need to sell right away, even if the rest of the market moves higher from here.
To identify the stocks you don't want to own right now, we're turning to the charts for a technical look at five big-name stocks that are starting to look toxic.
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.
Marvell Technology Group
Up first on our list of toxic trades is semiconductor stock Marvell Technology Group (MRVL) - Get Report . If you've owned shares of Marvell in the last year, you have my condolences. This $4 billion tech name has been almost cut in half in the last year, shedding 48% of its market value since January 2015. The bad news is that shares could have even lower to slide in 2016.
Marvell is currently forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares (at $8 in Marvell's case) and downtrending resistance to the upside. Basically, as Marvell's shares have bounced between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakdown through our $8 price floor. When that happens, we've got our sell signal.
Relative strength, which measures Marvell'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 year, which tells us that this stock is still underperforming the rest of the market in the long-term. If you own shares of Marvell, keep a close eye on that $8 line in the sand.
Philippine Long Distance Telephone
We're seeing the same setup right now in shares of $9 billion telco Philippine Long Distance Telephone (PHI) - Get Report , better known as PLDT. This big foreign communications stock has been forming a textbook descending triangle of its own for the last few months, and recent dollar strength hasn't helped its trajectory. The big breakdown level to watch in PLDT is support at $40.
Shares are testing a breakdown through our $40 support line this week.
Why all of the significance at that $40 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle in Philippine Long Distance Telephone, 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.
The $40 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 $40 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level.
Shares spent most of yesterday's session below $40, only to claw back above that level before the close. If that price line gets materially busted in the next few sessions, look out below.
Edgewell Personal Care
It doesn't take an expert trader to figure out what's been going on in shares of mid-cap consumer product maker Edgewell Personal Care (EPC) - Get Report . Instead, the price action that's dragged shares 43% lower in the last year is about as simple as it gets. Edgewell has been stuck in a well-defined downtrend since this past summer -- and shares are pointed even lower in 2016.
Edgewell's downtrending channel is formed by a pair of parallel trend lines that have corralled this stock's trading since late May. Every test of the top of this stock's price channel has been a great selling opportunity so far, and that makes any near-term move higher in this stock look suspect. At the start of January, shares ricocheted off of trendline resistance for an eighth time; with that bounce in place, look out below as Edgewell moves back towards the bottom of its price range.
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 Edgewell Personal Care.
Since last fall, mid-cap gas station company Murphy USA (MUSA) - Get Report had been showing investors the opposite story. This stock rallied almost 22% between the beginning of September and this Wednesday. But shares gave back a big chunk of that performance with yesterday's 7% drop in shares -- and in doing so, Murphy is violating the uptrend that's been propelling shares for those last four months.
The suggested catalyst for yesterday's big drop? This week's big Poweball drawing, believe it or not. Investors are apparently concerned that the end of that record lottery run will come with an end to all of the foot traffic that convenience stores have been enjoying. And while Murphy's peers ended slightly lower yesterday, it was the only stock that also busted through support in the process.
As I said a moment ago, all trend lines eventually break. And when they do, the price action tends to be pretty rough for anyone who's left in the stock. That could certainly be the case in shares of Murphy USA. From here, the next semblance of support is a prior low from November down at $56. But if that level gets violated too, $50 could be the next stopping point for this gas station stock.
Last on our list of toxic trades is Salesforce.com (CRM) - Get Report . For the last few months, Salesforce has been forming a textbook bearish reversal setup. And after shares busted through support at $76, Salesforce has been in breakdown mode. The selling may not be over in this $47 billion enterprise software developer.
Salesforce.com started forming a pretty textbook head and shoulders top back in mid-October. The head and shoulders is a price pattern that signals exhaustion among buyers. It's 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 Salesforce's neckline, which is the previously mentioned $76 price level that got violated this month.
Price momentum is an extra red flag to watch in Salesforce right now. Our momentum gauge, 14-day RSI, has been in a downtrend since this pattern started forming. That's a bearish divergence from price that signals buyers have been quietly fading in shares of Salesforce since the fall. With $76 in the rearview mirror, prior support at $68 looks like the next possible stop for shares on the way down.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.