BALTIMORE (Stockpickr) -- After a 15-month rally in the broad market, stock investors have a lot to lose right now. That's all the more reason why you should be looking out for "toxic stocks" in your portfolio.
Having just a few performance drags in your portfolio can be enough to decimate your returns in 2014. The fact that 17 of the 30 big, safe stocks in the Dow Jones Industrial Average are down since January does a perfect job of making the case for being selective in picking stocks. If you bought the five best Dow stocks in January, you'd be up 7.8% year-to-date; if you bought the worst five, you'd be down 8.4% over that same stretch. So yes, there's a lot of disparity between the best and worst performers right now.
So which stocks are set to drag your portfolio the lowest in the next few months? Today, 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 Japanese automaker Nissan Motor (NSANY), which hasn't exactly been turning out stellar performance up to this point. While General Motors (GM) and Ford (F) are up 20% and 16%, respectively, in the last 12 months, Nissan's shares have fallen 16% over the same timeframe. But shares look ready to fall even further in 2014.
That's because Nissan is currently forming a descending triangle pattern, a bearish price setup that's formed by a downtrending resistance level above shares and horizontal support to the downside at $16.50. Basically, as NSANY bounces between those two technically significant price levels, it's getting squeezed closer and closer to a breakdown below support. When that move through $16.50 happens, we've got our sell signal.
Relative strength has been atrocious in NSANY for the last year and change. And with the broad market due for a correction in the weeks ahead, that serial underperformance in Nissan could be the catalyst for shares to crack $16.50.
Keep a close eye on that level this week.
We're seeing the exact same setup in shares of Commercial Metals Company (CMC), a mid-cap steel manufacturer. Like Nissan, CMC is forming a descending triangle pattern, in this case with a support level at $18.50. A breakdown below that $18.50 threshold is our sell (or short) signal for shares.
Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Descending triangles are a good way to quickly 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 $18.50 support level in CMC is the spot where there's previously been 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. So if $18.50 gets taken out, you'll want to join them in exiting shares.
So much for LinkedIn's (LNKD) status as investors' favorite social media stock -- it has been looking toxic since back in September. You don't need to be an expert to figure out what's going on in LinkedIn's chart -- the setup in this stock is about as simple as it gets. LNKD has been bouncing lower in a well-defined channel for the last six months or so without an end in sight.
Now, as LNKD pushes up to test resistance for a sixth time in the downtrend, it's time to think about selling a bounce off of the top of the channel. 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 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 ensuring that sellers are still in control before you unload your stake in LNKD.
Luckily for value investors, the sky-high valuation on LinkedIn right now should prevent too many bargain-hunters from snapping up shares just before they make another leg lower. The real danger, though, comes for anyone who's holding onto shares and waiting for a rebound. It makes more sense to sell the resistance bounce here.
Nokia (NOK) has seen no shortage of attention from investors in 2014. This Finnish handset maker has been one of the most volatile high-volume names of the year thanks to speculation over this firm's future. But in the short-term at least, this stock looks toxic.
Nokia is forming a textbook head and shoulders pattern, a bearish reversal setup that indicates exhaustion among buyers. The head and shoulders 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 came yesterday on a move through the neckline right at $7.50. If you haven't already, it makes sense to sell NOK here before it moves down to test its nearest support level at $6.70.
Momentum, measured by 14-day RSI, adds some extra confirmation to downside in NOK. Our momentum gauge broke its uptrend in the middle of the pattern, an indication that selling pressure is overwhelming buying pressure right now.
Last up is $2.5 billion airline stock JetBlue Airways (JBLU). JetBlue has enjoyed some impressive price action in the last six months, rallying more than 30% on the heels of a broad boost across the whole airline industry. But, like Nokia, JBLU is starting to look "toppy" here.
JetBlue is another head and shoulders trade, in this case with a neckline at $8.25. While that $8.25 price level hasn't been violated yet, shares are close enough that it's worth watching closely in the market sessions ahead. Otherwise, if shares can manage to break through the top of the pattern, the bearish overtones get invalidated. That's why it's critical not to be early on the trade.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.