BALTIMORE (Stockpickr) -- All told, it's shaping up to be a pretty solid week for stocks. Between Monday's open and Thursday, the big S&P 500 has climbed 1.2% -- and even better, it took most stocks along for the ride. Almost 80% of S&P components are up so far this week.
But there's an important takeaway here. If four-fifths of the S&P are up, that must mean that another 20% of stocks are down this week. Some big-name stocks, such as Humana (HUM) or Oracle (ORCL), are actually down a lot. If 2015's relatively weak price action has taught us anything, it's the fact that underperformance can be both persistent and material.
And knowing which stocks to avoid can have impact on your portfolio's gains this year than knowing which ones to buy. 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 $30 billion fuel refining and marketing firm Valero Energy (VLO - Get Report). Unlike most other stocks in the energy sector, Valero has actually been a strong performer in 2015, rallying more than 21% since the start of the year. But it could be time for investors to start thinking about taking gains on shares.
Valero is currently forming a descending triangle pattern, a bearish price setup that's formed by horizontal support down below shares at $56, and downtrending resistance to the upside. Basically as Valero bounces between those two price levels, it's been getting squeezed closer and closer to a breakdown below that $56 price floor. When that happens, we've got a sell signal.
Relative strength at the bottom of the chart (not to be confused with RSI up top) is an extra red flag in Valero. 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 Valero is materially underperforming the broad market right now -- and statistically speaking, it makes shares likely to keep underperforming for the next three-to-ten months.
If $56 gets violated in Valero, look out below.
We're seeing the same setup in shares of $7 billion industrial manufacturer Flowserve (FLS - Get Report), though the price action on Flowserve's chart is a bit more textbook than the descending triangle in Valero. For Flowserve, the sell signal comes on a breakdown below support down at $53. Shares are testing that price floor this week.
Why all of the significance at $53? It's not magic. Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns such as 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 Flowserve's shares.
That $53 level in Flowserve is a spot where there has been an excess of demand for shares; in other words, it's a price where buyers are more eager to step in and buy shares at a lower price than sellers are to sell. That's what makes a breakdown below support so significant -- it would mean that sellers are finally strong enough to absorb all of the excess demand at the at price level.
Anyone who owns Flowserve should keep a close eye on that $53 price level.
Six Flags Entertainment
Theme park operator Six Flags Entertainment (SIX - Get Report) has had some pretty solid price action so far in 2015. Since the beginning of the year, this $4.5 billion stock has managed to climb just shy of 10%, more than tripling the anemic performance in the S&P 500 year-to-date. But after going strong for the first half of the year, Six Flags is starting to look "toppy" this summer.
Six Flags 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 Six Flags, the breakdown level to watch is support down at $46.
Momentum, measured by 14-day RSI, is another red flag for Six Flags. Our momentum gauge has been making lower highs February, a bearish divergence that indicates selling pressure is building in shares. If $46 gets violated, you don't want to own Six Flags any more -- at least in the intermediate-term.
It doesn't take an expert trader to figure out what's been happening in shares of trucking company Con-way (CNW) lately. A quick glimpse at this chart should tell you just about everything you need to know. Con-way's chart has been pointing down and to the right since last fall, shoving shares more than 18% lower in 2015 alone.
And it doesn't look like that trend is coming to an end anytime soon.
Con-way's price channel is formed by a set of parallel trendlines that identify the high-probability range for shares of this stock to remain stuck within. In other words, every single move to the top of the channel this year has been great a selling opportunity so far, and that relationship is unlikely to change all of a sudden this summer. At this point, 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 Con-way.
Last up on our list today is grocery store chain Kroger (KR - Get Report). There's actually a lot to like about Kroger's business right now -- but there's at least one thing not to like, and that's this stock's chart. After spending the last year and change moving higher, investors might want to think about taking some gains off the table soon.
Kroger 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 $68. While shares had tried to move above the top of the right shoulder with yesterday's earnings call, Kroger's price action ultimately faded back down over the course of the trading session. That's not an especially bullish sign for anyone who's long this stock.
It's important to be reactionary when you're looking at Kroger (or any of the other "toxic" stocks on this list). After all, technical analysis is a risk management tool, not a crystal ball. That means that downside in Kroger doesn't become a high-probability trade unless $68 gets violated. And a move above prior highs at $78 invalidates the head and shoulders top.
Either way, if you have a stake in this stock, it's a very good idea to keep a close eye on that $68 level this summer. If it gets broken, you don't want to own Kroger anymore.