BALTIMORE (Stockpickr) -- The S&P 500 may be hovering around all-time highs this week, but that doesn't mean all of its constituent stocks are. In fact, as I write, one out of every three stocks in the big index is actually down since the start of 2014. For comparison's sake, a whopping 91% of the S&P was up year-to-date this time in 2013.
Put simply, picking the right stocks matters more this year. And avoiding the wrong ones might be even more important than that. That's why we're taking a closer look at five 'toxic' names to avoid in September.
Buying blue chips doesn't make you immune from owning toxic names. In fact, every single name on our list today is a mega-cap stock that's worth more than $100 billion in market value. So these aren't just names to avoid buying -- you might already own them today.
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 oil service giant Schlumberger (SLB) , a name that's been beating the rest of the broad market all year long: SLB is up more than 15.7% since the start of 2014. But that good performance has been shifting lower. SLB peaked at the start of the summer, and it's been dropping like a stone ever since. Now shares are likely to continue their drop.
Schlumberger has spent the last few months forming a descending triangle setup, a bearish setup that's formed by horizontal support (at $105 in this case) and downtrending resistance to the upside. Basically, as SLB bounced in between those two technically-important levels, it's been getting squeezed closer to a breakdown below that $105 price floor. That finally happened at the start of this week, triggering a key sell signal in SLB.
Relative strength adds another red flag to the setup in SLB. This stock's relative strength line broke through its uptrend just before the beginning of August, an indication that SLB is now underperforming the rest of the market. As long as the new downtrend remains intact, SLB's underperformance should continue.
We're seeing the exact same setup in beer brewing giant Anheuser-Busch InBev (BUD) right now -- the big difference is that the sell signal hasn't triggered yet in this name. For the descending triangle in BUD, the breakdown comes on a violation of support at $106. Don't unload this stock until that price floor gets taken out.
Why all of the significance at $106? 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 descending triangle 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 $106 level in BUD is the spot at which 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. BUD doesn't officially become toxic until that buying pressure is gone.
Drug maker Pfizer (PFE) has looked toxic for a while now – and the good news is that you don't need to be an expert technical trader to figure out why. Instead, PFE is bouncing its way lower in a pattern that's about as simple as they get: a downtrending channel.
The channel in PFE is formed by a pair of parallel trendlines that identify the high-probability range for shares of Pfizer to trade within. Every successive test of resistance has been a good opportunity to get out of this stock before it dropped. And drop shares have -- all told, shares of Pfizer are down more than 9% since their peak in April, underperforming the S&P 500 by a whopping 14% over that stretch of time. And as PFE presses up against trendline resistance for the fifth time since it topped, it makes sense to sell this bounce lower.
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 PFE.
So, what happens when a trend line does break? Oil and gas supermajor Chevron (CVX) provides a pretty good example of that. CVX has been moving up, up, and away for most of 2014, making higher ground while in a well-defined uptrend. But CVX broke support for the first time at the end of July, and shares broke their second attempt at support this past week.
Chevron's failure to catch a bid at support is a big red flag that's important to catch before shares are testing new lows. Sellers are clearly in control of this stock in September, and the most recent trend line break is likely to come with a little more downside in the near-term and a lot more downside in the intermediate-term. Shares are just now starting to establish a downtrend like the one in Pfizer.
Momentum, measured by 14-day RSI, adds some extra context to the downtrend in CVX. Our momentum gauge has been making lower highs over the course of the channel, an indication that buying pressure is still waning, even now.
Last up is telecom giant Verizon Communications (VZ) . Verizon hasn't had a particularly impressive run in 2014. In fact, shares are just below breakeven this year, which means that VZ has already been a pretty heavy drag on your portfolio compared to the rest of the broad market. But Verizon is starting to look "toppy" in September, and that's a very good reason to stay away from this stock.
Verizon 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 VZ's neckline at $48.50, a level that's been important from a technical standpoint going back to May.
Lest you think that the inverse 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 a good reason to keep an eye on Verizon's $48.50 level this week.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.