BALTIMORE ( Stockpickr) -- It's been a great week for stock-market investors. Since Monday, the big S&P 500 Index has rallied 2.19%, rebounding following a correction that started in late June. As I write, about 80% of S&P components are up since the beginning of the week.
That's an impressive stat, but it bears an important question: What about the other 20% of stocks?
Even though the S&P 500 has been about breakeven, the price action in the individual stocks has been a lot more directional. Either a stock is leading the market, or it's been a dog all year long. That's a big deal, because owning the stocks that aren't working in 2015 has been a sure-fire way to torpedo your performance this year. A big chunk of the market still looks toxic as we head deeper into the second half of 2015.
Today, we'll take a technical look at five big toxic stocks to avoid this summer.
Just to be clear, the companies I'm talking about here 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. For that reason, fundamental investors need to decide how long they're willing to take the pain if they want to hold onto these stocks 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, technical analysis 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.
There are no two ways about it: The last year has been a challenging one for shareholders of TiVo (TIVO). Since the calendar flipped to January, shares of this billion-dollar DVR maker have slid more than 22%. The bad news is that the shares are still pointing lower from here.
TiVo essentially spent all of 2015 forming a descending triangle pattern, a bearish price setup that's formed by resistance that's becoming lower above the shares and horizontal support to the downside (in this case at $10.50). Basically, as shares of TiVo have bounced between those two technically important price levels, the stock has been getting squeezed closer and closer to a breakdown below our $10.50 price floor.
That sell signal triggered earlier this month -- and although the shares have moved up since then, a throwback means that we're likely to see another leg down in the near term.
Relative strength, at the bottom of the chart, is an extra red flag in TiVo. That's because our relative-strength line has been in a downtrend of its own 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.
McGraw Hill Financial
Meanwhile, shares of McGraw Hill Financial (MHFI) have fared a lot better in 2015. Since the start of the year, this data provider has seen its shares rally by more than 18%.
But it might be time for investors to start thinking about taking some of those gains off the table. McGraw Hill is showing a similar setup to the one in TiVo. For McGraw Hill, the descending triangle triggers if $100 support gets violated.
Why all of that significance at that $100 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle pattern in McGraw Hill, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for McGraw Hill's stock.
The $100 support level is a price where there has been an excess of demand for shares. In other words, it's a spot at which buyers have previously been more eager to step in and buy than sellers have been to take gains.
That's what makes a breakout below $100 so significant. The move means that sellers are finally strong enough to absorb all of the excess demand at that price level. Like with any breakout trade, it's important to be reactionary here; downside in McGraw Hill doesn't become a high-probability trade until sellers are able to shove this stock below $100.
Even though the descending triangle in McGraw Hill isn't exactly textbook (it's typically a continuation pattern that shows up at the bottom of a downtrend, like in TiVo), the trading implications are unchanged here.
This is turning out to be a rough year for $11 billion apparel stock Ralph Lauren (RL). Year-to-date, this stock is down more than 28%, making the broad market's barely-above-breakeven price action look pretty attractive by comparison. Most of that downside came in the first five weeks of the year. Since then, the shares have been churning sideways in a tight range.
Here's what you need to know from here.
The sideways price action in Ralph Lauren has been forming a setup called a rectangle pattern. The rectangle gets its name because it "boxes in" shares in between a pair of parallel resistance and support lines. For Ralph Lauren, resistance is up at $140 and support is down at $127.50. Consolidation setups such as this one are common after big moves, and because Ralph Lauren's prior trend was down before the shares started chugging sideways, a violation of support at $127.50 is the more likely outcome here.
On the flip side, Ralph Lauren breaks out of its toxic range with a move above $140. Don't try to predict which way this stock is going to resolve -- just be ready to react when buyers and sellers figure out their next steps.
Mexican milling company Gruma (GMK) is starting to look "toppy" this summer. After being propelled more than 22% higher earlier this year, Gruma has spent the last several months forming a classic top pattern. That means that this $5 billion stock is another one that investors might want to get ready to take gains on while they still can.
At this point, Gruma is 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 Gruma, that's the $47.50 support level on the chart.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in Gruma. Our momentum gauge has been in a downtrend since February, making lower highs on each of the tops in Gruma's reversal pattern. That's a bearish divergence that indicates buying pressure is weakening. If $47.50 gets violated, then it's time to sell.
Grand Canyon Education
Last up on our list of toxic trades is $2 billion for-profit education stock Grand Canyon Education (LOPE). The good news is that you don't need to be some kind of expert technical trader to figure out which way this stock is pointing right now -- the shares have been moving down and to the right since last fall. The bad news for shareholders is that Grand Canyon Education (LOPE) is likely to keep moving lower this summer.
The price pattern in Grand Canyon Education is about as simple as it gets. Since last fall, this stock has been bouncing its way lower in a well-defined downtrending channel, swatted down on every test of trend line resistance. Every test of the top of Grand Canyon Education's price channel has been a great selling opportunity, and as shares test that level for a sixth time now, it makes sense to sell the next unsuccessful test of resistance.
Waiting for that bounce lower before clicking "sell" is a critical part of risk management for two big reasons: It's the spot at which prices are the highest within the channel, and alternatively it's the spot at which 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 Grand Canyon Education.