BALTIMORE (Stockpickr) -- Finally. After a pretty nasty start to the week, the big stock indices managed to bounce on Thursday, catching a bid after giving back about half of 2015's hard-earned gains. But the picture being told by the big stock market indices is a little misleading.
Frankly, saying that "stocks are up" this year is a case of wishful thinking. We're four months into 2015, and just about half of the S&P 500 is actually down this year.
Put simply, some stocks just look "toxic" right now. And outperforming in this market is more about not owning the wrong stocks than it is about owning the right ones. That's why, today, we're taking a closer look at five toxic stocks to sell in May.
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 entry and exit points.
So without further ado, let's take a look at five toxic stocks you should be unloading.
Las Vegas Sands
Up first is casino stock Las Vegas Sands (LVS). Shareholders in this $41 billion gaming resort owner have been dealt a pretty ugly hand lately. Since this time last year, shares have shed about 35% of their market value. The bad news is that LVS could actually have further lower to go.
LVS has spent all of 2015 forming a descending triangle pattern, a bearish continuation pattern that's formed by downtrending resistance up above shares and horizontal support to the downside (in this case at $52 support). Basically, as shares of LVS have bounced between those two technically important price levels in 2015, this stock has been getting squeezed closer and closer to a breakdown below our $52 price floor. When that happens, we've got a pretty big sell signal.
Relative strength, at the bottom of the chart, is an extra red flag in LVS. That's because our relative strength line has been in a downtrend since last summer, an indication that this stock isn't just losing steam here, it's also significantly underperforming the rest of the market pretty materially.
Owning this stock may already be a roll of the dice here, but it becomes toxic with a move below $52.
We're seeing the same pattern in shares of $17 billion oil company Cenovus Energy (CVE). Like LVS, Cenovus is forming a descending triangle pattern of its own, with a breakdown level down at $16.50 support. If that $16.50 line in the sand gets violated, then look out below.
Why all of the significance at $16.50? 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 CVE's shares.
That $16.50 level in CVE is a 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 -- it means that sellers are finally strong enough to absorb all of the excess demand at the at price level.
Keep a close eye on that $16.50 price in CVE. Once sellers knock out that level, a whole lot of downside risk opens up.
Integrated energy giant Exxon Mobil (XOM) is another big energy stock that's looking toxic right now -- and you don't need to be an expert trader to figure this chart out. In fact, the downside setup in Exxon is about as simple as they get.
Exxon has spent the last year bouncing its way lower in a well-defined downtrending channel, swatted lower on every test of trend line resistance. In other words, every test of the top of Exxon's price channel has been a great selling opportunity, and as shares bounce lower for a fourth time now, it makes sense to unload XOM as this big energy stock underperforms the rest of the sector.
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 XOM.
A lot of stocks in the energy sector are finally starting to look attractive again. XOM isn't one of them.
Automaker General Motors (GM) is another large-cap stock with a deceptively simple chart. GM started off 2015 in an uptrend, but that all changed in mid-April, when shares violated trendline support. Since then, GM has been underperforming its peers, and it's pointed lower this spring.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in GM. Our momentum gauge has been in a downtrend of its own since January, making lower highs at the same time shares were trying to move higher. That was a bearish divergence that tipped traders off to the fact that GM's price action was weakening. With the RSI downtrend still intact, the selling isn't over here.
GM has a new downtrend in its price chart now too. Support at $32 looks like the next potential stopping point on the way down. From a risk/reward standpoint, it makes sense to get out now.
Last up on our list of potentially toxic stocks is chemical maker DuPont (DD).
The price action in DuPont hasn't been particularly constructive lately. Since shares peaked back in March, this stock has given back almost 9% of its market value, underperforming the broad market in pretty dramatic fashion. But zoom out a bit more, and things actually look a lot worse…
DuPont has been forming a head and shoulders top, a setup that indicates exhaustion among buyers. The pattern 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 DuPont's neckline at $70.50. If that $70.50 level gets violated, look out below.
This chart's minimum measuring objective puts a price target down at $60 if DuPont's neckline gets broken. That's a 14% downside risk from here. Investors thinking about building a position in this stock should wait and see how things play out as shares edge closer to that $70.50 level this week.