BALTIMORE (Stockpickr) -- The S&P 500 is knocking out new highs this week, but that's not stopping some of Wall Street's biggest names from looking "toxic" as we head into March. Own these names at your own peril.
Over the course of this broad market rally, there's been a bigger-than-normal gap between the leaders and the laggards. In a very real way, the S&P 500's 22% run higher in the last 12 months has magnified the benefits of owning momentum leaders -- as well as the underperformance you'll see if you hang onto the toxic names.
Want to secure market-beating performance in 2014? Then avoiding the performance drags on your portfolio is more than half the battle. That's why we're taking a technical look today at five toxic stocks you should start selling.
Just to be clear, 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, 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.
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 U.S. Steel (X), a name that's actually managed to turn out some strong performance recently. In the last six months, U.S. Steel has rallied more than 36%, besting the broad market by more than double. But shares of X are starting to look "toppy" as we head into March.
That's because U.S. Steel has spent the last four months forming a head and shoulders top, a bearish reversal pattern that indicates exhaustion among buyers. The head and shoulders is formed by two swings highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal came on a move through the neckline just below $25 -- it triggered at the start of this week.
Now X is pulling back to re-test newfound resistance at that neckline price. A bounce lower is the next high-probability opportunity to be a seller. Momentum adds some confirmation to the downside risk in X; 14-day RSI has been trending lower since the head and shoulders started in this stock.
The exact same setup is in play in shares of processor giant Intel (INTC); the biggest difference is the fact that the downside signal hasn't triggered yet. That means that Intel's a name worth watching closely right now, but it's premature to start unloading shares. The sell signal doesn't happen until Intel slides through its neckline at $23.50.
A break through the neckline gives Intel a downside target of $20.50, a price level that not-so-coincidentally acted as support for shares back in April of last year. If you decide to go short shares of INTC on the breakdown through support, I'd recommend keeping a protective stop right at the 50-day moving average.
Don't be early on this trade. It doesn't become a high-probability setup until Intel fails to catch a bid at the $23.50 level.
Craft Brewers Alliance
The smallest name on our list of toxic stocks is Craft Brewers Alliance (BREW). Even though the beer may be good at BREW, shares of this small-cap beverage stock are showing some holes thanks to a broadening top pattern that's been forming since the end of October. Here's how to trade it.
The broadening top is a price pattern that looks exactly like it sounds. The setup formed by a pair of support and resistance levels that are diverging after a big move higher. For BREW, the move has certainly been big; shares are up more than 149% over the last year -- but the subtext is that this stock has a lot of room to the downside with pretty tentative support levels along the way.
The real problem of a broadening top is the fact that it indicates volatility is getting injected into shares, particularly to the downside. Lower highs in momentum are another signal that BREW's rally is losing its steam -- 14-day RSI has been in a downtrend since the pattern started forming last Fall, an indication that down days are more forceful right now than up days have been.
The sell signal comes when BREW falls through support, currently at $14.
After spending most of its post-IPO life as a Wall Street darling, the honeymoon is starting to look like it's over in LinkedIn (LNKD). And you don't have to be an expert technical analyst to see why all it takes is a quick glance at the chart...
LinkedIn is currently bouncing lower in a downtrending channel, a setup that boxes in the high-probability range for shares to stay within. When it comes to trend channels, up is good and down is bad; it's really just as simple as that. So, LNKD's channel certainly doesn't look good right now. That's especially true with shares sitting at trendline resistance right now.
The top of LinkedIn's channel has acted like a ceiling for shares on its last five tests, so there's little reason to think attempt number six will suddenly change things. The sell signal comes on a bounce off of resistance. When shares start their next leg lower, you don't want to own shares.
Last up is Suncor Energy (SU), a petroleum stock that's showing traders the exact same setup as the one in LinkedIn. Like the social media firm, this energy giant is bouncing lower in a well-defined downtrend. And with shares testing the top of the channel, the optimal time to be a seller comes on a bounce lower.
Waiting to sell off a resistance bounce makes sense for two big reasons: it's the spot where prices are the highest within the channel, and 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 ensuring that sellers are still in control before you unload your stake in SU.
Relative strength looks rough in Suncor right now. That's a particularly bad signal, considering the fact that we're looking about ready for a correction in the broad market again. Negative relative strength is like kryptonite for your portfolio in 2014.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.