BALTIMORE (Stockpickr) -- Mr. Market started 2014 off on a sour note, giving back around 5% in the first six weeks of the year. In fact, the New Year kicked off the first time we saw four straight down weeks since 2011.
That's right -- we've just lived through the longest stretch of unabated selling in two and a half years. So even though that 5% drop isn't all that jarring on an absolute basis, the length of time since the last "up week" for the S&P 500 has been tough. For the record, I think we're still headed higher from here. Yesterday's session was just a preview of that.
But that doesn't mean that you should breathe easy just yet. There's still a chance you've got some toxic stocks in your portfolio. Today, we'll take a technical look at five of them.
To be fair, the companies I'm talking about today aren't exactly junk.
By that, I mean they're not next up in line at bankruptcy court. But that's frankly irrelevant; from a technical analysis standpoint, these toxic stocks are some of the worst positioned names out there 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.
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 planning their stock execution.
So without further ado, let's take a look at five toxic stocks you should be unloading.
First up is Enbridge (ENB), a $35 billion energy transportation name that's essentially spend the last year churning sideways. While the S&P has rallied more than 17% in the trailing 12 months, ENB is down 5.7%. But ENB's slow decline could be the start of something more material thanks to the long-term bearish price setup that's been forming in shares.
Enbridge is currently forming a descending triangle pattern, a bearish price setup that's formed by downtrending resistance above shares, and a horizontal support level to the downside at $40.25. Basically, as ENB bounces in between those two technically important levels, it's getting squeezed closer and closer to a breakdown below that $40.25 support level. When that happens, it's time to be a seller.
Whenever you're looking at any technical price pattern, it's critical to think of buyers and sellers. Triangles and other price pattern names are a good way to describe what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That horizontal $40.25 support level in ENB is the spot where there's an excess of demand for shares; in other words, it's a price where buyers have been more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes a breakdown below support so significant -- the move means that sellers are finally strong enough to absorb all of the excess demand at the at price level. If ENB slips below $40.25, it's time to unload shares.
Things have looked a lot better for paper products maker Kimberly-Clark (KMB) in the last few months. Since October, KMB has rallied more than 12%, making it a much better performer than your average S&P or Dow Jones component. But that outperformance could be grinding to a halt -- Kimberly-Clark is starting to look "toppy."
Kimberly-Clark is currently forming a double top pattern, a price setup that's formed by two swing highs that peak at approximately the same price level. The sell signal comes on a move through the support level that connects the two tops: it's at $103 in KMB. If shares can't manage to catch a bid at $103 on the next test of that level, it's time to sell.
Momentum adds some extra evidence to a breakdown in KMB. That's because 14-day RSI has been making lower highs even while shares hit their head on the same resistance level. Since momentum is a leading indicator of price, investors should consider it a big red flag. But the red flag doesn't trigger a trade action unless shares fall through $103.
The technicals are a little less, well, technical in shares of HCP (HCP). It doesn't take an expert trader to figure out what's going on in shares of this $17 billion health care REIT. A quick glance at the chart should tell you everything you need to know.
That's because shares of HCP are currently bouncing lower in a textbook trend channel, a price setup that's formed by a pair of parallel trendlines that bound HCP's share price movement. When it comes to price channels, it's about as simple as it gets: Up is good and down is bad. HCP's chart looks the latter right now, especially as shares push up against trend line support. They've gotten batted lower on the last three attempts at this level. Sell the bounce.
Maybe worse, relative strength looks awful in HCP right now. Considering that relative strength remains the single most important market indicator while the S&P remains in corrective mode, that's a big reason to stay away from the long side of this stock.
Even though Swiss electrical engineering firm ABB (ABB) has more or less managed to keep pace with the S&P 500 over the last year, this stock is starting to look toppy right now. ABB may be giving investors a 3-day reprieve from selling, but a lot more downside looks likely thanks to a classical reversal pattern that's been forming in shares over the long-term.
ABB is currently forming a head and shoulders top, a bearish price pattern that indicates exhaustion among buyers. The head and shoulders is formed by two swing highs that top out at approximately the same level (shoulders), separated by a higher peak in between them (the head). The sell signal comes on a push through the pattern's neckline, which is right at $25.50 for ABB.
Last up is another textbook head and shoulders setup: JPMorgan Chase (JPM). Like ABB, shares of JPM are forming a very well-formed head and shoulders top pattern, in this case with a neckline right below the $55 level. So despite the big springboard higher in shares of JPM in yesterday's session, it looks like we're just seeing the right shoulder get formed. A dip below that $55 neckline is still the sell signal.
JPM is another trade with a telling momentum chart. The multi-month uptrend in RSI broke last week, giving way to lower highs and a downtrend in the momentum gauge. With the RSI line approaching its own resistance level in the next session or two, we could see JPM come back down to test $55 sooner rather than later.
Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise: a recent 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 good reason to keep an eye on both ABB and JPM this week.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.