BALTIMORE (Stockpickr) -- No doubt about it, volatility isn't going anywhere in September. Even though Thursday showed investors a measly 0.12% move higher, it was still a rollercoaster ride. After launching the S&P 500 as much as 1.3% early in yesterday's trading session, traders turned tail, shoving the big market index back down to near-breakeven on the day.
The recent spike in volatility means two things: It means that outperformers are going to move up quickly, and it means that the laggards are going to be absolutely toxic for your portfolio.
We're already seeing that manifest itself in the broad market right now. As I write, a whopping 42% of the stocks in the S&P 500 are down double-digits since the start of 2015. Some have even been halved -- or worse.
Put simply, not owning the "wrong" stocks is just as important as owning the right ones this fall. So to find out which stocks are showing downside risk ahead, we're turning to the charts for a technical look at five big "toxic stocks" you don't want to own…
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 on our list is $31 billion telco China Unicom (CHU - Get Report) . It's no secret that Chinese stocks have been under pressure in recent months, and China Unicom has been no exception. This stock has shed about 34% of its market value since shares peaked back in April.
What many investors may not realize is that China Unicom could be headed even lower from here.
China Unicom is currently forming a descending triangle setup, a bearish price pattern that's formed by horizontal support down below shares (in this case at $12.75) and downtrending resistance to the upside. Basically, as China Unicom bounces between those two technically significant price levels, it's been getting squeezed closer and closer to a breakdown below that $12.75 price floor. If that $12.75 line in the sand gets violated, then look out below.
Relative strength, which measures China Unicom's price performance vs. the broad market, is the side indicator to watch here. The lower highs in our relative strength line tell us that this stock is still underperforming the S&P 500 right now. As long as that relative strength downtrend keeps pointing lower, China Unicom's price action should continue to lag as well.
Even though U.S.-based healthcare company Aetna (AET) is located on the opposite side of the globe from China Unicom -- and the opposite side of the performance spectrum -- we're seeing the exact same setup in shares of this $39 billion health insurer.
Aetna is another descending triangle setup, in this case with support down at the $110 level. Even though the price pattern isn't exactly textbook (it's showing up at the top of Aetna's 2015 uptrend, not the bottom of a downtrend), the trading implications are just the same here. Aetna becomes a sell if $110 gets violated.
Why all of that significance at that $110 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle pattern in Aetna, 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 Aetna's shares.
The $110 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 breakdown below $110 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 Aetna doesn't become a high-probability trade until sellers are able to knock this stock below our $110 support level.
General Growth Properties
The price action has been pretty one-sided in shares of mall REIT General Growth Properties (GGP) in 2015. Since the start of the year, this commercial landlord has seen its share price drop by more than 10.5%. The selling in GGP doesn't look like it's coming to an end yet -- and you don't need to be an expert trader to figure out why, either.
GGP has been bouncing its way lower in a well-defined downtrending channel, with shares moving lower every time this stock has hit its head on the top of that price range. In other words, every test of the top of GGP's price channel has been a great selling opportunity, and investors have seen three of them so far. Even though shares still have some upside room before they hit the top of their channel again, this stock is likely to keep getting cheaper in the longer-run. It makes sense to be a seller on the next bounce down.
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 GGP.
After a 20% rally year-to-date in shares of Sealed Air (SEE - Get Report) , it might be time to start thinking about taking some gains off the table in this $10.5 billion packaging firm. That's because Sealed Air is showing off a classic head and shoulders top, a bearish reversal pattern that indicates 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 Sealed Air's neckline -- that's at the $49.50 price tag. If $49.50 gets violated, then Sealed Air opens up considerable downside risk.
The 50-day moving average has been acting like a good approximation of the top of the right shoulder for the last couple of weeks. For Sealed Air to invalidate its signs of a top, it'll need to successfully hold a move above its 50-day. Until then, caveat emptor.
Another big bullish trend that's showing some cracks in September is Netflix (NFLX - Get Report) . In fact, Netflix comes into this month as the single best-performing S&P 500 component of 2015, up 107% since the first trade of January. But, like Sealed Air, Netflix is showing traders a pretty textbook head and shoulders top. A violation of Netflix's neckline at $100 is the signal to sell.
That round number breakdown level comes with some extra psychological significance for investors too. A move down below the triple-digit mark is going to be pretty conspicuous for market watchers, and that, in turn, could exacerbate any downside action that Netflix sees here.
Finally, the side-indicator to watch right now in Netflix is momentum. Our momentum gauge, 14-day RSI, has been rolling over, making lower highs on each of Netflix's successive peaks. That's an indication that down days are outpacing up days in this stock. Shares are close to our $100 level today. If that level gets violated, then Netfilx could see a material correction for September.