The selling isn't stopping: The U.S. market closed lower for the fifth day in a row on Wednesday, locking in the longest losing streak since last September.
It's not just February, though. The U.S. market has been under nonstop pressure in 2016. The big S&P 500 index is down more than 10.5% since the calendar flipped to January -- and it's down more than 14% since the highs hit by the S&P last fall.
All told, it's the worst market rout in five years -- and if you own any "toxic stocks" in your portfolio, it's probably been much, much worse. As of this writing, one in 10 S&P components is down 25% or more in 2016. We're talking about a huge group of large-cap stocks that's showing utterly awful performance in the first six weeks of the year.
And as Mr. Market feels around for lower levels this week, the next round of toxic stocks could end up even worse off in the next six weeks of 2016. To identify the stocks you don't want to own right now, we're turning to the charts for a technical look at five big-name stocks that are starting to look toxic.
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.
Just so we're clear, the companies I'm talking about today are hardly junk. By that, I mean they're not next up in line at bankruptcy court -- and many of them have very strong businesses. But that's frankly irrelevant to what happens to their stocks. 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.
So without further ado, let's take a look at five toxic stocks to sell.
Topping our list of laggards is $1.4 billion daily deals site Groupon (GRPN - Get Report) . Groupon has been a toxic stock for a while now; investors have lost almost 70% of any dollar they had invested in this stock just 12 months ago. The bad news is that shares are probably headed even lower from here, even in spite of today's earnings pop.
Groupon has spent the last few months forming a descending triangle pattern, a bearish continuation pattern that's formed by downtrending resistance up above shares, and horizontal support to the downside at $2.50. Basically, as Groupon bounced between those two technically significant price levels, this stock has been getting squeezed closer and closer to a breakdown through that $2.50 price floor -- and that sell signal finally triggered at the start of this week.
Relative strength, which measures Groupon's price performance versus the broad market, is an extra red flag to watch here. Our relative strength line is still holding onto its downtrend from the beginning of last summer, which tells us that this stock is still underperforming the rest of the market in the long-term. Shares are seeing an earnings-driven pop back above $2.50 early today, but it's a little early to get excited about it. Even in the best-case shares remain below resistance here.
We're seeing almost the exact same setup in shares of Perrigo (PRGO - Get Report) , minus the earnings-fueled jump. Like Groupon, Perrigo has spent recent months forming a descending triangle pattern, in this case with a key breakdown level at $140. That $140 price level got violated with Monday's open below support. That means it's a good idea to sell Perrigo if you haven't already.
Why all of the significance at that $140 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle in Exxon, 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 shares.
The $140 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 been previously been more eager to step in and buy than sellers are to take gains. That's what makes a breakdown below $140 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level. Look out below in Perrigo.
Dr. Pepper Snapple Group
Meanwhile, things have been looking a lot better in shares of Dr. Pepper Snapple Group (DPS) recently; this beverage stock is up 15% in the last year. But that rally is starting to show some cracks in 2016. Dr. Pepper Snapple violated its uptrend earlier this month, and it's been looking "toppy" ever since. Now the big breakdown level to watch is support at $88.
DPS is currently forming a double top pattern, a bearish reversal setup that looks just like it sounds. The setup is formed by a pair of swing highs that top out at approximately the same price level -- the trough that separates those peaks is the aforementioned breakdown level at $88. If shares violate that $88 line in the sand, then it's time to be a seller in DPS.
Price momentum is an extra red flag to watch in the DPS trade right now. Our momentum gauge, 14-day RSI, has been in a downtrend since this pattern started forming, making a pair of lower highs while the price action was reaching the same level. That's a bearish divergence from price that signals buyers have been quietly fading in shares of Dr. Pepper Snapple. If $88 gets materially violated, it's time to take gains on DPS.
We're taking another look at IBM (IBM - Get Report) today, after the legacy tech giant made last week's toxic stocks list. A week ago, IBM was bouncing. Shares had bottomed in mid-January, and the stock had been making its way higher in spite of the market rout. But the context for IBM was pretty clear on the chart in the long-term – IBM was stuck in a well-defined downtrend. And, as I said last week, "that makes any near-term move higher in this stock look suspect."
Sure enough, IBM started selling off at the beginning of this week, stopping short of trend line resistance for a seventh time before reversing back to its 52-week lows. Even through IBM is back in the lower half of its price channel, it's a mistake to look for a buying opportunity in this stock. Shares could trade considerably lower from here without testing trendline support.
It makes sense to stay away from the long-side of IBM until shares can catch a bid above the 50-day moving average again. If the 50-day gets busted, then the downtrend is over. Until then, IBM stays toxic for your portfolio.
Fast food giant McDonald's (MCD - Get Report) has been holding up well in spite of the selloff. In the last six months, this stock has been heading higher, up more than 18% over that stretch. For a little perspective, the S&P is down 12% over the exact same timeframe.
But it might be time to take some gains off the table if you own McDonald's here. Despite this stock's reputation for being defensive, shares are looking "toppy" in February.
For the last few months, McDonald's has been forming a head and shoulders top, a classic price pattern that signals exhaustion among buyers. It's 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 McDonald's neckline, which is the $115 price level.
There's good reason to pay attention to this particular price action in McDonald's right now: a recent academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant." If McDonald's violates $115 in February, it's a sell.