BALTIMORE (Stockpickr) -- It's been hard to miss the Santa Claus Rally that's filled investors with holiday cheer in the second half of December -- the big S&P 500 index hit a new all-time closing high on Christmas Eve, adding onto more than 5.7% gains booked since December 17.
To put that in perspective, the big index is up 12.6% since the start of 2014. That means that nearly half of the broad market's one-year performance has come in just the last six trading sessions.
So while the market stats might look attractive now, 2014's rally has been a whole lot more hit-or-miss than most folks realize. Own the wrong stocks, and you've underperformed the S&P 500 dramatically this year. That's precisely why we're taking a closer look at Mr. Market's naughty list: five names that look "toxic" 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
So, without further ado, let's take a look at five "toxic stocks" you should be unloading.
Up first on the naughty list is Deutsche Bank (DB) , the $42 billion Frankfurt-based global banking giant. Deutsche Bank hasn't been a stranger to underperformance; since January, this stock has sold off more than 35% in a well-defined downtrend. As if that weren't bad enough, the price action has been evolving for the worse since the last time we looked at it.
Deutsche bank is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support (down just below $30 in this case), and downtrending support to the upside. Basically, as DB bounced in between those two technically important price levels, it's been getting squeezed closer to a breakdown below our $30 support line. When that happens, we've got our sell signal.
Relative strength adds another red flag to the setup in DB. This stock's relative strength line has been trending lower since the beginning of the year (just like price), telling us that Deutsche Bank is underperforming the broad market here. As long as the downtrend in relative strength remains intact, DB's underperformance should continue.
Nu Skin Enterprises
We're seeing the exact same setup in shares of direct sales company Nu Skin Enterprises (NUS) . While Nu Skin didn't start off the year in a nicely-formed downtrend, it has been selling off all year long, down more than 67% as I write. The bad news for shareholders is that a reprieve doesn't look likely here -- NUS is forming a descending triangle. The big sell signal comes on a violation of key support at $37.50.
If NUS trades below that line in the sand at $37.50, look out below.
Why all of the significance at $37.50? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns 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 NUS' shares.
That $37.50 level in NUS 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. For that reason, any violation of $37.50 means that a whole lot of downside risk just opened up in Nu Skin.
China has been a definite weak spot in the stock market in 2014. The SPDR S&P 500 China ETF (GXC) is underperforming the U.S.-centric S&P 500 by double-digits, as notable dual-listed Chinese equities have been pummeled by strength in the dollar and economic weakness in the People's Republic. Bitauto Holdings (BITA) has been one notable exception -- shares have more than doubled in 2014, rallying 127% as I write.
But shareholders might want to start thinking about taking gains here; BITA looks toxic in the long-term.
Bitauto is currently forming a double top pattern, a bearish reversal setup that looks just like it sounds. The sell signal comes on a violation of key support at $65 -- in other words, if $65 gets violated, then the pattern is confirmed and BITA is a strong sell. There's still plenty of time to get out of this name before it tests that $65 price floor for a second time. BITA longs would need to see a sustained close above $95 for the bearish pattern to get invalidated.
Momentum is the side-indicator to watch in BITA. 14-day RSI, our momentum gauge, made lower highs between the first and second tops, an indication that buying pressure is seriously waning in BITA. If $65 gets violated, look out below.
The good news is that you don't need to be an expert technical trader to figure out what's going on in shares of Telekom Indonesia (TLK) -- the bad news is that it looks toxic. This $23 billion communications stock has been trending lower since September, after rolling out of an uptrend that led shares higher for the first nine months of 2014. TLK is still up more than 26% for the year, and that's exactly why investors should think about taking gains before it gives more back.
Since TLK's uptrend got violated, this stock has been bouncing its way down in a well-defined downtrending channel, a price setup that gives us a high-probability range for shares to stay stuck within. Put another way, every successive test of trendline resistance has been an excellent opportunity to be a seller from a risk/reward standpoint, and as we come up to test that same line for the fourth time now, the high-probability trade is to sell the next leg lower.
Don't get thrown off by the abundance of gaps on TLK's chart right now. Those gaps, called suspension gaps, are caused by overnight trading on the London and Indonesian Exchanges. They can be ignored for trading purposes...
Genesis Energy (GEL) is another stock that's stuck in a well-defined downtrend as we head into 2015. That shouldn't come as a big surprise -- energy stocks have been shellacked in the last six months, and Genesis' midstream exposure and big dividend payout haven't helped to soften the blow from tumbling commodity prices. So, as shares test trendline resistance for the fifth time here, 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 GEL.
The 50-day moving average has been a good proxy for resistance on the way down -- longs should avoid trying to buy the newfound bargain in GEL until shares can catch a bid above that MA line. As long as GEL remains within the channel here, the long-term trajectory is lower.
-- Written by Jonas Elmerraji in Baltimore.
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