Editor's pick: Originally published June 17.
Yesterday's 0.3% climb in the S&P 500 may not look very meaningful, but it was. That's because Thursday marked the first time in the last six trading sessions that the S&P 500 has actually moved higher.
In that stretch, approximately 400 of the stocks within the S&P are lower than they started. And more than 100 of them -- a fifth of the entire big index -- are down 5% or more this past week. That's a pretty substantial down-move for such a short amount of time. And it tells investors a pretty important message: if you want to survive the choppy markets we're experiencing in 2016, you'd better make sure you don't own any "toxic" stocks.
Simply not owning the worst-performing corners of this market has more to do with posting positive performance in the second half of 2016 than owning the best performers.
To find the stocks waving red flags here, we're turning to the charts today for a technical look at five big stocks that could be toxic to own.
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.
The LinkedIn (LNKD) acquisition may have shone a bullish spotlight on social media stocks this week, but it's not changing the bearish trajectory that's been shaping up in shares of Twitter (TWTR - Get Report) all year long. Since January, Twitter has been in decline, losing almost a third of its market value year-to-date. Thing is, Twitter could have even further to fall in the second half of 2016.
Twitter has spent the entire year forming a descending triangle pattern, a bearish continuation pattern that's formed by horizontal support down below shares (at $14 in this case), and downtrending resistance to the upside. Basically, as this stock bounces in between those two technically important prices, shares have been getting squeezed closer and closer to a breakdown through our $14 price floor. When that $14 level gets violated, we've got a clear-cut sell signal in Twitter.
This week's LinkedIn deal did send Twitter up to test its trendline resistance level, but shares backed off pretty quickly in yesterday's session. That provides some added confirmation that sellers are still getting out of this stock at every opportunity. Stay away from Twitter until it's able to start posting some higher lows.
From a fundamental perspective, Twitter is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. The portfolio rates the stock a Three, meaning it would sell shares on strength. Cramer and Research Director Jack Mohr wrote:
The only reason to own seems to be for the takeover, though we caution this should never be the sole reason to own a stock. Whenever we are asked about owning a stock for the takeover value, our response remains the same: Own it for the fundamentals, not the speculation. Twitter is void of fundamentals and anyone who has listened to the hundreds of takeover speculation alerts has been sorely disappointed (and lost fistfuls of money in the process). While we can never completely rule out a takeover, especially given the company's high-profile status, with shares comprising a paltry 0.41% of our portfolio, it is quite literally a placeholder position that we have told members to stay far away from since we all but exited a year back.
We're seeing the same price setup in shares of small-cap biotech stock Bluebird Bio (BLUE - Get Report) . It's a bit of a misnomer to call Bluebird a small-cap stock After all, it wasn't that long ago that this drug developer was actually well in mid-cap territory. But a 77% selloff in the last 12 months has changed the story there, and a descending triangle could spell even lower levels ahead.
For Bluebird Bio, the key support level to watch is down at $39.
Why all of the significance at that $39 level? It all comes down to buyers and sellers. Price patterns, such as this descending triangle setup in Bluebird Bio, 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 of the stock itself.
The $39 support level in Bluebird is a place where there has been an excess of demand for shares; in other words, it's a spot where buyers have been more eager to step in and buy shares than sellers have been to take gains. That's what makes a breakdown below $39 so significant - the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level. If $39 gets violated, look out below.
Meanwhile, 2016 has actually been a pretty strong year for shares of $5.6 billion business services stock Genpact (G - Get Report) . Year-to-date, Genpact is up nearly 9%, outperforming the S&P 500 by a big margin. But Genpact's rally is beginning to show some cracks this summer - and shareholders might want to think about taking some of those recently won gains off the table in June.
Genpact is currently forming a double top, a bearish reversal setup that looks just like it sounds. The double top in Genpact is formed by a pair of swing highs that peak out at approximately the same price level - the sell signal comes in at the trough that separates that pair of peaks. For Genpact, that support line is down at $26.50. If shares can't hold support at $26.50, then this recent high-flier becomes a sell.
It's important to be reactionary with the Genpact trade, just like any of the other potentially toxic stocks on our list today. Technical analysis is a risk management tool, not a crystal ball -- and this stock doesn't become a high-probability sell until shares actually fail to catch a bid at the $26.50 level. Until then, it's a good idea for shareholders to keep a close eye on this stock; shares are within striking distance of that $26.50 line in the sand this week.
Host Hotels and Resorts
Things have been pretty straightforward lately for shares of $12.3 billion hotel stock Host Hotels and Resorts (HST - Get Report) in the last year or so. Put simply, this isn't a stock that you've wanted to own lately. In the last 12 months, Host has lost about 20% of its market value. And the downtrend is very much intact this June.
Host has been bouncing its way lower in a downtrending channel, a price range that's corralled Host's chart going all the way back to the end of last summer. Put simply, every test of trendline resistance has given sellers their best opportunity to get out before this stock's subsequent leg lower. And shares are testing that price ceiling for a seventh time now. Trend line support, at the bottom of the channel, has been less robust than resistance, but that doesn't invalidate the downtrend at all; if anything it means that downside volatility is outsized in this trade.
The confirmed sell signal in Host is the next bounce lower. Waiting for a bounce 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 Host Hotels.
Smith & Wesson Holding
Firearm manufacturer Smith & Wesson Holding (SWHC) has been a politically charged stock this week as the gun control debate reignited following the terror attack in Orlando, and it's being fundamentally pushed today following earnings that beat estimates. But despite all of the headlines surrounding this gun stock right now, the chart tells you everything you need to know about whether or not you should buy it here…
Smith & Wesson looks "toppy" thanks to a head and shoulders top pattern, a bearish reversal pattern that indicates exhaustion among buyers. The 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 Smith & Wesson's neckline at $21.
Price momentum is an extra red flag to watch in Smith & Wesson right now. Our momentum gauge, 14-day RSI, has been making lower highs on each of the three peaks in the head and shoulders pattern. That's a bearish divergence from price that signals buyers have been quietly fading in this stock. Shares of S&W are moving higher this morning following earnings, but as of this writing, they're still within the right shoulder. That's a good reason to keep an eye on $21.