BALTIMORE (Stockpickr) -- The big S&P 500 index hit new record highs once again in yesterday's session, extending Mr. Market's year-to-date gains to 7.8%. But don't break out the champagne glasses just yet. A handful of "toxic stocks" could be getting in the way of that performance for your portfolio.
You see, despite a strong start to the year in the big indices, many individual names are struggling to get traction this summer. As I write, a full third of S&P 500 components is trading at a lower price today than back in January -- and a third of those names are down more than 10%.
The takeaways are pretty obvious: hang onto the wrong stocks, and you'll miss out on this rally. What's less obvious is which specific names you should be avoiding. So today, we're taking a technical look at five toxic names to 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.
Up first is Japanese car giant Toyota Motor (TM - Get Report) , a name that's been trailing the broad market all year long. Since the calendar flipped to January, shares have shed 5%, a dip that contributes to double-digit underperformance versus the S&P. But that could just be the beginning. TM looks primed for more downside from here.
That's because Toyota has spent the last two months forming a descending triangle, a bearish price pattern that's formed by horizontal support below shares (at $118 in this case), and downtrending resistance to the topside. Basically, as shares of TM bounced in between those two lines on the chart, its share price has been getting squeezed closer and closer to a breakdown below that key $118 support level. That breakdown is the sell signal in TM – and it happened at the start of August.
Don't be fooled by last week's pullback to retest newfound resistance at $118; all that move did was demonstrate the fact that sellers are still alive and well at that level. The snap lower this week confirms that downside is in play in shares of Toyota. This stock could move down to support at $104 before it catches a bid again.
Chinese oil and gas giant PetroChina (PTR - Get Report) is a pretty stark contrast to what's been going on in Toyota. The People's Republic's $239 billion national oil company has been on fire in 2014, rallying more than 26% since the start of the year. But that doesn't change the fact that PTR looks toxic right now. If you're long this name, it's time to start thinking about taking gains.
PetroChina is currently forming a double top, a bearish reversal pattern that looks just like it sounds. The double top is identified by a pair of swing highs that top out at approximately the same price level; it triggers a sell on a move through the trough that separates the two tops. For PetroChina, that breakdown level is down at $130. That's an important condition for this trade that hasn't been met yet. Until PTR violates support at $130, downside isn't a high-probability trade yet.
But it's critical to read the red flags that are waving already. One of the glaring ones is momentum, measured by 14-day RSI. PTR's momentum gauge made lower highs while price was hitting its head on the same level. That's a good indication that buying pressure is waning in August.
Grana y Montero
$2.2 billion Peruvian holding company Grana y Montero (GRAM) is another breakout trade that's showing investors some big red flags right now. After a big move lower back in January, shares of GRAM have been consolidating sideways for the last few months, setting up the possibility of another leg lower to end August.
GRAM's price pattern is called a rectangle. The rectangle gets its name because it basically "boxes-in" shares of a stock between a pair of parallel trend lines. In this case, the top of the rectangle is $18.25, and the bottom is down at $16. Consolidation setups like this one are common after big moves, but since GRAM's prior trend was down before shares started chugging sideways, a violation of support at $16 is the more likely outcome here. If $16 gets broken, it's time to sell GRAM.
Relative strength adds some extra confidence to the downside risks in GRAM right now. This stock's relative strength line has been downtrend all year long -- even during this sideways phase -- an indication that GRAM is significantly underperforming the rest of the market. Since negative trends in relative strength point to more downside on a rolling three-to-10-month basis, that's a big concern for longs here.
There's some good news and bad news for Valeant Pharmaceuticals VRX shareholders right now. The good news is that this stock is likely to move higher for the rest of August; the bad news is that upside potential will be cold comfort in the context of the bigger downtrend that's been swatting shares lower like clockwork since February. It makes sense to sell the next resistance bounce in VRX.
The price action in Valeant Pharma is pretty self-explanatory – this stock's price action has been down and to the right for the better part of the last year, taking shareholders' portfolio values along with it. Valeant's setup is formed by a pair of parallel trend lines that have identified the high-probability range for shares to stay within over the course of those last seven months. So, as VRX tests trend line resistance for a seventh time, it makes sense to be a seller on the next bounce off of that line.
I'd recommend staying away from the long-side of VRX until shares can press up through their 50-day moving average, a level that's been a fair proxy for trend line resistance on the way down. Until that happens, the downtrend is intact.
Last up is Loews (L - Get Report) , a name that's showing traders the exact same setup as the one in Valeant. Just like with VRX, this stock has been bouncing its way lower in a well-defined channel since the start of the year. So while shares could move a little higher in the immediate term, buy-and-hold investors should think about planning their exits.
The next optimal selling opportunity for this stock comes on a bounce off of trend line resistance.
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 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 Loews.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.