BALTIMORE (Stockpickr) -- U.S. equity markets are starting to catch a bid again. After a grinding start to 2015, the big stock indices are finally making moves, busting their way to new all-time highs again this week.
While the S&P 500 index has spent most of the year flirting around breakeven, it's finally putting up some material numbers again. Year-to-date, the index is up 3.5% as I write. That may not sound like much at first, but it puts everyone's favorite stock average on track to return 11.6% in 2015, including dividends.
It's tempting to think that's good news for your portfolio, but the fact is that just because the S&P is showing signs of life again doesn't mean that all of the individual stocks in the market are too. Some look downright "toxic" right now.
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.
Up first is global technology stock Pitney Bowes (PBI). PBI has been a frustrating stock to own over the last year or so. From 12 months ago to today, this stock has shed more than 12% of its market value. That decline in shares looks even worse when you consider that the S&P 500 is actually up 13.5% over that same timeframe.
Thing is, PBI could have even further to fall. Here's why.
Pitney Bowes is currently forming a long-term descending triangle pattern, a bearish price setup that's formed by horizontal support below shares (in this case at $22) and downtrending resistance to the upside. Basically, as Pitney Bowes bounces between those two technically important price levels, it's been getting squeezed closer and closer to a breakdown below our $22 price floor. If that happens, then we've got a big new sell signal in this stock.
Relative strength at the bottom of the chart (not to be confused with RSI), is an extra red flag in PBI. 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 in the long-term. Things really get ugly if $22 gets violated.
It probably shouldn't come as a huge surprise that billion-dollar metallurgical coke producer SunCoke Energy (SXC) looks toxic right now. After all, the whole basic materials sector has been under pressure over the last year. But, like PBI, SunCoke is showing a descending triangle pattern that could trigger even more downside in the near-term. For SXC, the breakdown level to watch is $15 support.
Why all of the significance at $15? 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 SXC's shares.
That $15 level in SunCoke 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 $15 price in SXC. Once sellers knock out that level, a whole lot of downside risk opens up suddenly.
Simulation and training firm CAE (CAE) is another stock that looks toxic in the near-term -- and you don't need to be an expert technical trader to see why. Instead, a quick look at this chart should tell you just about everything you need to know: CAE has been bouncing its way lower in a downtrend since October.
The selling in CAE has been pretty orderly; this stock 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 CAE's price channel has been a great selling opportunity, and as shares bounce lower for a sixth time now, it makes sense to sell. Even though the bottom of the channel has been a less solid level for shares, that's an extra reason to sell; shares could conceivably fall through the bottom of the channel again.
This week's bounce off of trend line resistance means shares are headed back in that direction again.
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 have the most to lose), and alternatively it's the spot where you'll get the first indication that the downtrend is ending (if shares can break above the top of the channel, the downtrend is over).
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 CAE.
$44 billion French telco Orange (ORAN) is starting to look "toppy" in May.
Orange is currently forming a long-term head and shoulders pattern. The head and shoulders 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 ORAN's neckline at $16. If that $16 level gets violated, then it's time to sell.
Don't get thrown off by the abundance of gaps on Orange's chart right now. Those gaps, called suspension gaps, are caused by overnight trading on the Euronext and Borsa Italiana. They can be ignored for trading purposes -- but don't ignore a violation of $16.
Last up on our list is mid-cap business services and commercial printing firm Deluxe (DLX). Like Orange, Deluxe is forming a pretty textbook head and shoulders top in the long-term. So while this stock is up 7% year-to-date -- and more than 22% in the last year -- it's time for anyone who owns this stock to think about taking some gains off the table.
The sell signal comes on a breakdown below DLX's neckline down at $63.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in DLX. Our momentum gauge has been in a downtrend since October, making lower highs on each of the three price peaks in DLX's head and shoulders pattern. That's a bearish divergence that indicates buying pressure is weakening.
In case 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."
If $63 gets broken, then you don't want to own Deluxe anymore.