BALTIMORE (Stockpickr) -- Owning the wrong stocks could be hazardous to your portfolio's health this holiday season.
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That's actually been the case all year long. Trite as the old expression may be, "it's a market of stocks, not a stock market" has held incredibly true in 2014. Stock market correlations have been low all year long in 2014 -- and falling. That means that it's been incredibly easy to pick losing stocks in this environment. As I write, nearly a third of the S&P 500 is still down on the year, even though the index itself is up more than 10%.
And that "market of stocks" doesn't look likely to change in 2015. That's why we're taking a technical look at five "toxic stocks" you should sell (or short) in December.
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
So without further ado, let's take a look at five "toxic stocks" you should be unloading.
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2014 has been a great year for real estate investment trusts, or REITS. Small-cap mortgage REIT ZAIS Financial (ZFC) has been no exception. Since January, shares are up double digits on top of a huge 9% dividend yield. But now could be the time to start taking gains on ZFC. Shares are starting to show signs of a long-term top that could trigger in the next week.
ZAIS Financial is currently forming a descending triangle pattern, a bearish price setup that's formed by a horizontal support level below shares (at $17.20 in this case) and downtrending support to the upside. As shares bounce in between those two technically-important price levels, they've been getting squeezed closer to a breakdown bellow our price floor down at $17.20. If that level gets violated, then we've got a strong sell indication in shares.
ZFC is pointing down, but the good news is it's not out of the game just yet. If shares can close materially above their most recent swing high at $18, then the bearish bets are off. That makes $18 a logical place to keep a protective stop if you opt to make a short bet on the breakdown.
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Independence Realty Trust
It shouldn't come as a big surprise that we're seeing a similar setup in another small-cap REIT right now: Independence Realty Trust (IRT) . Since these two stocks are in the same sector, and they're similar sizes, they have high correlations with one another. The breakdown level to watch now in IRT is support down at $9.25.
Relative strength adds another red flag to the setup in IRT. This stock's relative strength line broke its uptrend last month, and his been trending lower ever since, telling us that IRT is underperforming the broad market here. As long as the downtrend in relative strength remains intact, Independence Realty's underperformance should continue.
Again, downside isn't a foregone conclusion here until $9.25 gets taken out. On the flip side, a trade above prior resistance at $10 is our signal that the bearish price action has run its course. Shorts should keep a stop above that $10 round number resistance level. We're still very much in an environment where REITs should have some tailwinds pushing at their backs -- but there's no shortage of real estate investment trusts that are actually showing traders bullish price action. Buy them, and avoid these two toxic REIT names.
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There's a lot to like about Baltimore-based Under Armour (UA) , but this stock's chart isn't one of them. Under Armour has been one of the best-performing names in the apparel industry this year. Shares are up almost 60% since the start of January, boosted by strong fundamentals and the psychological boost of a stock split. But now, UA is starting to look toppy this month.
UA is forming a double top pattern, a bearish reversal setup that looks just like it sounds. The double top is formed by a pair of swing highs that top out at approximately the same price level. The sell signal comes on a breakdown below the support level that separates those two peaks. For UA, that sell signal comes in at $60.
Momentum is the side-indicator to watch in Under Armour. 14-day RSI, our momentum gauge, has been slowly bleeding lower, even as this stock's price has been testing highs. That's an indication that buying pressure is starting to wane long-term in UA. If $60 gets taken out, investors should take gains off the table until the correction is complete.
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Utility company UGI (UGI) is another stock that's starting to look "toppy" after a strong run in 2014. Like Under Armour, this $6.7 billion utility holding company is forming a double-top pattern; the big difference is that UGI's price setup is shorter-term. That means that a correction is closer to happening, but that it'll also be short-lived.
$36.50 is the breakdown level to watch for in UGI. If shares violate that price level, look out below.
Why all of the significance at $36.50? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns such as the double 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 UGI's shares.
That $36.50 level in UGI 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.
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German investment bank Deutsche Bank (DB) rounds out our list of toxic stocks today. The good news is that you don't need to be an expert technical trader to figure out why DB looks nasty here. The price setup in this stock is about as basic as it gets.
Deutsche Bank has been bleeding off all year long, bouncing its way lower in a well-defined downtrending channel, a trading channel that's marked the high-probability range for shares to stay within. Put another way, every test of trend line resistance has been a very good opportunity to sell this stock before the next reversal lower. So, with shares pressing up against resistance for an eighth time over the course of this channel, it makes sense to sell the next 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 DB.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory that returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji