BALTIMORE (Stockpickr) -- Thursday was a rough session for stocks. All told, the big S&P 500 index shed about 0.8% by the time the closing bell rang. On an absolute basis, no, that's not a huge decline. But just to put that into perspective, the big S&P 500 index gave back about 40% of its year-to-date gains yesterday.
Put simply, performance has been hard to come by in 2015. The big stock market indices have been grinding sideways for most of the year, and every basis point counts. That's why it's so crucial that you avoid the "toxic" stocks this year.
You see, while the market indices have been moving sideways, nearly a third of the S&P 500's component stocks are actually down double digits this year. Simply avoiding the bad trades is all it could take to propel your stock market performance this summer.
To find which stocks look sketchy, we're taking a technical look at five big toxic stocks to steer clear of.
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.
China Life Insurance
2015 has been a rough year for the Chinese equity markets. In fact, the People's Republic still has stopgap regulations in place to curb selling. Here at home, Chinese stocks trading on U.S. exchanges haven't been immune to the selloff: $122 billion insurance giant China Life Insurance (LFC) is down 30% from its April highs. The bad news is that the selloff in China Life may be far from over.
This summer, China Life is forming a pretty textbook descending triangle pattern, a bearish price setup that's formed by horizontal support down below shares and $18 and downtrending resistance to the top-side. Basically, as shares of China Life bounce in between those two technical price levels, they've been getting squeezed closer and closer to a breakdown below our $18 price floor. When that happens, we've got our sell signal.
Relative strength, which measures China Life's price performance versus the broad market, has been looking rough for the last several months -- and it's not improving as shares test support. As long as that downtrend in relative strength stays intact, investors should expect more underperformance from this stock.
2015 started out pretty nicely for shares of investment bank Goldman Sachs (GS - Get Report). Since February, shares have been in rally mode, outperforming the rest of the market by double digits. But more recently, this stock has been forming a descending triangle setup of its own, with a support level that's getting tested this week at $205.
If $205 gets violated, it's time for Goldman Sachs shareholders to start thinking about taking some gains off the table.
Why all of that significance at that $205 level? It all comes down to buyers and sellers. Price patterns, like this descending triangle pattern in Goldman Sachs, 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 Goldman's stock.
The $205 support level is a price where there has been an excess of demand for shares; in other words, it's a spot where 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 $205 so significant. The move means that sellers are finally strong enough to absorb all of the excess demand at that price level. Even though Goldman Sachs' price setup isn't exactly textbook (normally the descending triangle is a continuation pattern, not a reversal pattern), the trading implications aren't any different here.
Like with any breakout trade, it's important to be reactionary here; downside in Goldman doesn't become a high-probability trade until sellers are able to knock this stock below our $205 line in the sand.
Voya Financial (VOYA - Get Report) is another large-cap financial sector stock that's starting to show some signs of rolling over this week. Like Goldman, Voya has actually been a better-then-average performer in 2015, up 7% since the calendar flipped to January. But since the summer started, this stock has started to look "toppy" -- and shares are close to triggering a sell in August.
Voya Financial 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 Voya, that's the $45 support level on the chart.
Momentum, measured by 14-day RSI, adds an extra red flag to the price action in Voya. Our momentum gauge has been in a downtrend since June, making lower highs on both of the price peaks in Voya's price pattern. That's a bearish divergence that indicates buying pressure is weakening. If that $45 level gets violated, then it's time to sell.
You don't need to be an expert trader to figure out what's been going on in shares of Japanese automotive giant Toyota Motor (TM - Get Report) this summer. The price action in this $217 billion vehicle manufacturer is about as simple as it gets. Since March, Toyota has been selling off in an orderly downtrend, moving down and to the right. And as the summer drags on, this car stock still looks gassed.
Toyota's downtrend is well-defined. It's formed by a pair of parallel trend lines that have done a good job of identifying this stock's high-probability range all year long. Put simply, every test of the top of Toyota's price channel has been a great selling opportunity, and from here 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 where prices are the highest within the channel, and alternatively it's the spot where 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 Toyota. This downtrend isn't over until shares can break out above the 50-day moving average.
Last up on our list of potentially "toxic" stocks this summer is mid-cap transportation logistics stock XPO Logistics (XPO - Get Report). The last 12 months have been a bull market for shareholders in XPO. Over that year-long stretch, this big logistics stock has managed to rally more than 39%, stomping the S&P 500's performance by comparison. But it might be time to think about taking some of those gains.
XPO is currently forming a long-term head and shoulders pattern, a bearish reversal pattern that signals exhaustion among buyers. 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 XPO's neckline -- that's at the $42 price tag.
This is another chart where momentum is adding extra downside evidence. 14-day RSI made a series of lower highs at the same time that XPO's price action was forming the head and shoulders top. That's an indication that down days are outpacing up days in this stock. It looks like we'll see a test of XPO's neckline today. If $42 gets materially violated, then this stock is a sell.