BALTIMORE (Stockpickr) -- I've got some good news, and I've got some bad news.
First, even though market performance has been anemic in 2015, as I said yesterday, a big chunk of the individual names on the market are actually posting some meaningful performance this year. That's the good news.
The bad news is that an equal number of stocks are looking downright "toxic" right now. While the S&P 500 index has managed to scrape its way 3% higher year-to-date, one in 10 S&P components is down double-digits over that stretch of time -- and those are just the obvious ones. Owning these toxic stocks could be hazardous to your portfolio's health this summer.
That's why today we're taking a closer look at five toxic stocks you should sell in June.
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 DVR-maker TiVo (TIVO), a stock that's been giving investors no shortage of grief in 2015. Since the calendar flipped to January, TiVo has shed approximately 10% of its share price, underperforming during a stretch of time when performance has been hard to come by. The bad news is the TiVo could be in store for even more downside ahead.
TiVo is currently forming a textbook descending triangle pattern, a price setup formed by downtrending resistance above shares and horizontal support to the downside, in this case at $10.50. Basically, as TiVo bounces between those two technically significant price levels, it's been getting squeezed closer and closer to a breakdown below our $10.50 price floor. When that happens, we've got a big sell signal in this stock.
Relative strength at the bottom of the chart (not to be confused with RSI up top), is an extra red flag in TiVo. 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 $10.50 gets violated.
Things have been going a lot better in shares of $112 billion health care stock UnitedHealth Group (UNH). Since the beginning of the calendar year, UNH has added more than 15% to its share price, outperforming the rest of the S&P 500 by a factor of five. But investors might want to think about taking some gains off the table here. UNH is beginning to show signs of a top.
UnitedHealth is currently 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 peak at approximately the same level. The sell signal comes on a violation of the trough that separates those two tops. For UNH, that's the $112 support level on the chart.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in UNH. Our momentum gauge made lower highs at the same time that UNH's price action was re-testing resistance at its second top. That's a bearish divergence that indicates buying pressure is weakening.
We're seeing the exact same setup in shares of mid-cap business development company FS Investment (FSIC). Even though FSIC's business has zero overlap with UNH's both stocks are forming pretty textbook double-top patterns. For FSIC, the sell signal comes on a violation of $10.20.
Why all of the significance at $10.20? 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 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 FSIC's shares.
That $10.20 level in FS Investment 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 $10.20 price in FSIC. Once sellers knock out that level, a whole lot of downside risk suddenly opens up.
You don't have to be an expert technical trader to figure out what's been going on in shares of auto parts supplier Genuine Parts (GPC) lately. This stock has been in a pretty textbook downtrend for the last five months and change, trading down by almost 15% since the beginning of the year. And as shares come back up to test trend line resistance for an eighth time this year, it makes sense to sell the next bounce lower.
The price channel in GPC is formed by a pair of parallel trend lines that identify the high-probability range for shares of this stock to remain stuck within. In other words, every test of the top of GPC's price channel has been a great selling opportunity in 2015, and that relationship is unlikely to change all of a sudden this summer. If shares start to move off of resistance again, it's time to get out.
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 GPC.
Last up on our list of "toxic" stocks is Deutsche Bank (DB). This huge Eurozone banking stock has enjoyed a bit of a rebound this week, buoyed by European Central Bank comments that stimulus efforts were staying as planned -- but it's important not to get fixated on that recent upside in DB. Zoom out to the longer-term and this stock looks ready to reverse lower.
Deutsche Bank 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 DB's neckline at $30. If that $30 level gets violated, then it's time to sell.
Don't get thrown off by the abundance of gaps on DB's chart right now. Those gaps, called suspension gaps, are caused by overnight trading on the Frankfurt Stock Exchange. They can be ignored for trading purposes -- but don't ignore a violation of $30.
If $30 does get taken out, shares' next support level is down at $27.50.