Sell These 5 Stocks Now Before It's Too Late

At a glance, the S&P 500's nearly 7% gain year-to-date looks pretty impressive. It looks like this has been the sort of year where positive performance is easy to come by. But looks can be deceiving.

While the market averages are certainly up this year -- and skittering around all-time highs this summer -- a very big chunk of this market hasn't been participating in that performance.

In fact, as I write, nearly a third of S&P components are actually down since the calendar flipped to January.

Put simply, 2016's broad market performance isn't being driven by total market strength so much as it's being pushed by great performance in a smaller number of very big stocks. Don't own those stocks, and you can expect to underperform the S&P. Worse, there's a contingent of stocks that are beginning to look downright "toxic" for your portfolio's performance. Own them at your peril.

To figure out which stocks to steer clear of, 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.

Potash 

Leading things off is $13 billion fertilizer stock Potash  (POT) . Potash has been an awful performer in the past year, shedding nearly 40% of its market value -- and the bad news is that Potash's losing streak could be about to extend itself this summer. Here's how to trade it.

Potash is currently forming a textbook descending triangle pattern, a bearish continuation pattern that's formed by horizontal support down below shares (at $15 in this case) and downtrending resistance to the topside. Basically, as this stock bounces between that pair of technically significant price levels, it's been getting squeezed closer and closer to a breakdown through that $15 price floor. If and when that happens, it's a signal to sell.

Relative strength, which measures Potash's price performance against the rest of the stock market, adds some extra evidence to a continued downside move here. Our relative strength line is still holding onto its downtrend from last summer, signaling the fact that Potash continues to materially underperform the broad market. As long as that relative strength downtrend remains intact, this is a stock you don't want to own.

New York REIT 

We're seeing a similar price setup right now in shares of small-cap real estate investment trust New York REIT (NYRT) . Like Potash, New York REIT is currently forming a descending triangle pattern, in this case with a key breakdown level down at $9. If $9 gets violated here, NYRT becomes a sell.

What makes that $9 level in particular so significant? It all comes down to buyers and sellers. Price patterns, such as this descending triangle setup in New York REIT, 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 $9 support level in New York REIT 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 $9 so significant -- the move would mean that sellers are finally strong enough to absorb all of the excess demand at that price level.

Keep a close eye on how close shares get to that level -- and, more near-term, on whether they get swatted from resistance here in August.

CBS 

Meanwhile, things have actually looked pretty solid in shares of CBS (CBS)  recently. Since the calendar flipped to January, this entertainment stock has seen its share price rise nearly to 10% -- and more than double that since shares bottomed back in February. Despite the recent momentum in CBS, this stock is starting to look "toppy" in the long-term. It might be time for shareholders to take some of those recently won gains off the table.

CBS is currently forming a double top, a bearish reversal pattern that looks just like it sounds. The double top is formed by two swing highs that peak at approximately the same level. And the sell comes when the low separating that pair of tops gets violated. For CBS, that key breakdown level is support at $51.

Like with any of the potentially toxic trades on this list, it's critical to be reactionary with CBS. Technical analysis is a risk management tool, not a crystal ball, which means that increased downside risk in this stock doesn't actually trigger until our $51 price floor gets materially violated. Until then, shares are merely waving the caution flag.

Graco 

Mid-cap manufacturing stock Graco (GGG)  started off the year on a strong note -- but that performance hasn't held up in the months since. Instead, this stock has been fading since shares peaked back in mid-April. And you don't need to be an expert technical trader to figure out why you don't want to own this stock anymore; the price action in Graco is about as simple as it gets.

Since mid-March, Graco has been bouncing its way lower in a well-defined downtrending channel, a bearish price pattern that's corralled effectively all of this stock's price action since the end of the first quarter. Put simply, every test of trend line resistance has given sellers their best opportunity to get out before this stock's subsequent leg lower. In other words, don't mistake the recent sideways move in Graco for a recovery -- this stock is just working its way back to the top of its price channel.

Waiting for that 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 Graco.

Comcast

Last on our list is large-cap cable and entertainment stock Comcast (CMCSA) . Comcast has been a stellar performer in 2016, up almost 20% year-to-date. But that big rally is beginning to show some cracks this summer thanks to a classic price reversal pattern that's showing up in shares.

Since the start of July, Comcast has been forming a pretty textbook example of a head and shoulders top. The head and shoulders is a reversal 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 breakdown through Comcast's neckline, which is down at $66.50.

Price momentum is an extra red flag to watch in Comcast 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 that buyers have been quietly fading in this stock. That's another reason for investors to keep a close eye on the $66.50 level this month.

From a fundamental perspective, Comcast is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. On Friday, Cramer and Research Director Jack Mohr wrote that:

we remain confident in the business and believe its recent quarter is indicative of the positive changes in the cable business along with the growth prospects for NBCUniversal. On that note, NBCU announced this week an exclusive deal to all of J.K. Rowling's Wizarding World franchise (i.e., Harry Potter) beginning in 2018. This means NBC will have exclusive access to broadcast all eight Harry Potter films, in addition to the new Fantastic Beasts film (coming out later this year in theaters) and its sequels on NBC's family of television networks. We view this as a smart move by NBC in order to bring its investment in the Wizarding World full circle (recall the company has theme parks dedicated to the franchise), now engaging users from a television and digital perspective as well.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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