BALTIMORE (Stockpickr) – The S&P 500 closed at another new all-time high yesterday (well, technically anyway), ending a mostly sideways session up 5 basis points by the closing bell. That constantly higher price tag for stocks is ramping up investor anxiety this summer -- and between earnings season here at home and geopolitical tension overseas, investors are right to be nervous.
As I write, the S&P 500 is pressing up against the top of its long-term price range, a fact that makes a correction look a lot more likely than materially higher highs this summer. And that's just in the broad market. Some individual names are due for a whole lot more than a correction this month. In fact, some stocks could be downright toxic to your portfolio's health.
So today, we're taking a technical look at five big stocks you should sell.
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.
Altisource Portfolio Solutions
Up first is Altisource Portfolio Solutions (ASPS), a mid-cap real estate service provider. So far, Altisource has provided investors with some terrible performance so far this year. Since the calendar flipped to January, ASPS has dropped more than 25%. But this name could be due for an even bigger drop thanks to a toxic setup that's been forming in shares since February.
Altisource is currently forming a descending triangle setup, a bearish price pattern that's formed by horizontal support below shares at $95 and downtrending resistance to the upside. Basically, as ASPS bounces in between those two technically significant price levels, it's getting squeezed closer to a breakdown below that $95 price floor. If ASPS violates $95 support, then investors should expect another leg lower.
We're seeing selling pressure confirmed by relative strength in ASPS right now. The relative strength line has been making lower swing highs going all the way back to December, an indication that this name has been underperforming the market this whole time. Since relative strength is statistically a very good predictor of price action on a rolling three-to-10-month time horizon, it's a red flag worth heeding from here.
$30 billion defense contractor Raytheon (RTN) is another name that looks toxic this week. This isn't the first time I've talked about the rough setup in Raytheon's chart -- that was earlier in the week -- but with shares reversing lower prematurely in the last two sessions, it makes sense to revisit what makes this stock a sell.
Raytheon is currently forming a broadening top pattern, a bearish setup that's formed by a pair of support and resistance levels that are diverging after a big move higher. The widening range for RTN means that volatility is getting injected into shares, and that's exactly what we saw yesterday, when the firm's second quarter earnings spurred a 2% drop in shares before they made their way up to resistance this time.
The problem with holding on to a name such as Raytheon is that downtrending support line that's tracking lower at the bottom of this stock's range. That dropping support level means that RTN can move substantially lower within the setup without even testing an important support level. The lack of buyers in shares right now is a good reason to avoid Raytheon this summer.
It's been a phenomenal week for shares of LinkedIn (LNKD). Since Monday, shares of the professional social network are up more than 11%. But that doesn't mean that you should join the buyers in this name. LinkedIn has been a toxic chart in the long-term, and you don't need to be an expert technical trader to see why.
LNKD is bouncing its way lower in a well-defined downtrending channel, a trading range that's identified by a pair of parallel trend lines. Put simply, those lines identify the high-probability range for shares of LinkedIn to trade within -- and they're pointed lower from here. This week's 11% pop has been an "easy move" as this stock bounced off of trend line support and moved up to test trend line resistance. I wouldn't want to be long LinkedIn unless shares can break out above the top of the channel.
From here, it makes sense to be a seller on the next bounce off of trend line support. Waiting for that move down 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 LNKD.
AbbVie (ABBV) is pointed marginally higher this morning, after the firm announced positive second-quarter earnings numbers this morning. But the earnings news doesn't look like it'll be enough to derail the toxic trading setup that's been forming in shares since the middle of May. Here's how to trade it.
ABBV is currently forming a head and shoulders top, a setup that indicates exhaustion among buyers. The setup 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 ABBV's neckline at $53, a level that's been important from a technical standpoint going back to December.
Downside isn't a foregone conclusion in AbbVie yet. Until shares violate that neckline level, this stock is still catching a bid. The bearish pattern gets invalidated on a move above $58. If the trade triggers, then look for $46 as the next-nearest stopping point for shares.
We're seeing the exact same setup in shares of STMicroelectronics (STM) right now. Like ABBV, STM is forming a head and shoulders top, in this case with a neckline level at $8.70. If shares violate support at $8.70, then look out below.
Why all of the significance at $8.70? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns like the head and shoulders top 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 neckline level in STM 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. Keep a close eye on $8.70 this week.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.