BALTIMORE (Stockpickr) -- Think Mr. Market is taking a break from volatility this year? Think again.
Folks have been focusing on 2015's volatility this week. As it turns out, this year has so far shown investors the most uneventful start in decades. At a glance, that sort of statistic makes it sound like stocks have been trading calmly and quietly, but in fact, that's pretty far from the truth.
Yes, volatility may be low on a market level, but it's actually fairly high when you zoom into the individual stocks. As I write, one in five stocks in the big S&P 500 index are down at least 10%. That's more than double the percentage of S&P components that were down double-digits this time last year.
Put simply, the price action in 2015 hasn't been quite as calm and uneventful as some market watchers are suggesting. Some stocks look downright toxic this summer, and owning them could be a very bad thing for your portfolio.
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 analysisis 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 $21 billion residential REIT AvalonBay Communities (AVB). REITs have been under pressure lately, threatened by the possibility that a rate hike from the Fed could suddenly make these high-yield property plays look a whole lot less appealing to income investors. But even if you haven't been following the macro story in the REIT market, AvalonBay's chart says a whole lot right now.
In short, if you own this stock, it's time to think about taking your gains off the table.
AvalonBay spent most of 2015 forming a pretty textbook 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 AvalonBay that's the $165 support level on the chart, and it got violated this month.
Relative strength at the bottom of the chart (not to be confused with RSI up top), is an extra red flag in AvalonBay. That's because our relative strength line broke its uptrend in April, establishing a series of lower highs and lows that's been in force for the last couple of months. That new relative strength downtrend means that AvalonBay is materially underperforming the broad market right now -- and, statistically speaking, it makes shares likely to keep underperforming for the next three to 10 months.
Two Harbors Investment
Not surprisingly, we're seeing the same setup in shares of another big REIT: Two Harbors Investment (TWO). Even though Two Harbors is a mortgage REIT, the price action has been almost identical to AvalonBay, with the exception of the fact that this stock's double-top pattern got condensed into a shorter timeframe between March and now. Two Harbors' violation of support at $10.40 this week is the sell signal.
Why all of the significance at $10.40? 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 Two Harbors' shares.
That $10.40 level in Two Harbors was a spot where there had previously been an excess of demand for shares; in other words, it's a price where buyers were previously more eager to step in and buy shares at a lower price than sellers were to sell. That's what made a breakdown below support so significant -- it meant that sellers are finally strong enough to absorb all of the excess demand at the at price level.
If you still own this stock, it makes sense to get out until shares can find some semblance of support again.
When it comes to shares of $26 billion glass and ceramics maker Corning (GLW), there's some good news and there's some bad news. The good news is that the price setup in this stock is about as simple as they get; at a glance, it's not hard to see what's going on here. The bad news is that Corning looks toxic this summer.
Corning has been in a downtrend since February, bouncing its way lower on every test of the top of its price channel. That price channel 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, the last four moves to the top of the channel have been great selling opportunities in 2015, and that relationship is unlikely to change all of a sudden this summer. If shares bounce lower this week, we've got a new sell signal.
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 Corning.
Willis Group Holdings
$8.5 billion insurance stock Willis Group Holdings (WSH) has actually shown investors a pretty decent run so far in 2015. Since the calendar flipped to January, this London-based financial sector stock has rallied about 7.4%, beating the S&P 500's barely-there gains by a big margin. But investors in Willis might want to think about taking some of those gains off the table; this stock is starting to look "toppy" here.
Willis Group is currently forming a rounding top, another one of those technical price setups that looks just like it sounds. The rounding top pattern indicates a gradual shift in control of shares from buyers to sellers, and it triggers when the support line that connects the bottom of the pattern gets broken. For Willis Group, the breakdown level to watch is support down at $47.
Momentum, measured by 14-day RSI, is another red flag for Willis Group. Our momentum gauge has been making higher lows since February, a bearish divergence that indicates selling pressure is building in shares. If $47 gets violated, you don't want to own Willis Group any more -- at least in the intermediate-term.
Last up on our list of toxic stocks today is Mosaic (MOS), the $16 billion fertilizer manufacturer. Mosaic has been no stranger to volatility in recent months. Since peaking back in late February, this stock has sold off more than 16%. But while the beginning of the year rally and subsequent selloff may look haphazard, zooming out on this chart paints a different story -- one that doesn't look good for Mosaic shareholders this summer.
Mosaic 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 this stock's neckline at $44. If that $44 level gets violated, then it's time to sell.
If the head and shoulders in Mosaic does trigger, look at $40 support as the next likely downside level to get tested. A bounce off of that $40 price floor could be a good opportunity for patient longs to get back in -- but until then, Mosaic looks like a stock that's best avoided by buyers.