Despite some recent churning in stock market prices for the last few sessions, the big S&P 500 Index is still on track for a solid year in 2016. As of this writing, the S&P is up 6.3% since the calendar flipped to January, implying a 10% return in 2016 if that pace kept up for the rest of the year.
But that doesn't mean you'll see that double-digit performance in your portfolio.
As I write, 151 S&P components are actually down since the start of the year. And one in six S&P stocks is down 8% or more during that timeframe. Put simply, it hasn't been hard to own "toxic stocks." And there's no shortage of newly toxic trades sprouting up this summer.
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.
Bank of the Ozarks
Up first is mid-cap bank holding company Bank of the Ozarks (OZRK) . This Arkansas-based bank has been under pressure all year long in 2016, down almost 23% since the calendar flipped to January. The bad news is that shares could still have further to fall from here.
Bank of the Ozarks is currently forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares at $36, and downtrending resistance to the top-side. Basically, as Bank of the Ozarks pinballs in between those two technically meaningful price levels, it's been getting squeezed closer and closer to a breakdown through support. When that happens, we've got our sell signal.
Relative strength, which measures OZRK's price performance vs. 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 fall, signaling the fact that this stock continues to materially underperform the broad market even now.
As long as that relative strength downtrend remains intact, Bank of the Ozarks is a stock you don't want to own.
We're seeing the same setup in shares of billion-dollar debt collector PRA Group (PRAA - Get Report) . Like Bank of the Ozarks, this financial stock has been selling off hard lately, down almost 44% in the trailing 12 months. Shares have spent all year forming a descending triangle pattern; for PRA Group, the sell signal comes on a violation of $22.50.
What makes that $22.50 level in particular so significant? It all comes down to buyers and sellers. Price patterns, such as this descending triangle setup in PRA Group, are a good quick way to identify what's going on in the price action, but they're not the actual reason a it's tradable. Instead, the "why" comes down to basic supply and demand for shares of the stock itself.
The $22.50 support level in PRA Group 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 $22.50 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 shares handle their latest test of resistance this month.
Public Service Enterprise Group
Sliding up the market cap scale brings us to Public Service Enterprise Group (PEG - Get Report) , a utility holding company that's actually had a solid run in 2016. Year-to-date, shares of this $22 billion utility stock had climbed almost 15% higher on a total returns basis -- but shareholders might want to think about taking some of those gains off the table at this point. That's because PSEG is starting to look "toppy" this summer.
PSEG actually looked pretty bullish just a month ago. But since then, shares rolled over, forming what looks like a pretty textbook example of a double top. The double top is a bearish reversal pattern that looks just like it sounds. The pattern is formed by two swing highs that peak at approximately the same level. The sell comes when the low separating that pair of tops gets violated. For Public Service Enterprise Group, that key breakdown level is support at $43.
Price momentum is an extra signal that the buying pressure is waning in PSEG. That's because 14-day RSI, our momentum gauge for this stock, made a pair of lower highs at the same time that its price chart was making its double top pattern. That's a bearish divergence that signals selling pressure has been building here. Buyer beware.
Things are looking pretty straightforward in shares of Mexican beverage bottler Coca-Cola Femsa (KOF - Get Report) . Since peaking back at the end of April, this $5 billion beverage company has seen its share price unwind to the tune of 10%. The problem for shareholders is that the downtrend in Coca-Cola Femsa could drag shares a lot lower from here.
Coca-Cola Femsa has spent the last five months in a well-defined downtrending channel. That downtrend is formed by a pair of parallel trend lines that have corralled all of this stock's price action since the end of March. Put simply, every test of trend line resistance has given sellers their best opportunity to get out before this stock's subsequent leg lower. And shares are retreating from resistance for a sixth time this week.
Waiting for this most recent 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 Coca-Cola Femsa.
Last up on our list of potentially toxic trades is $85 billion drug maker Eli Lilly (LLY - Get Report) . Eli Lilly has shown some decent strength in recent months, climbing about 10% off of its March lows. And as auspicious as that may seem if you own this stock, there are some cracks forming in that rally. Here's how to trade it:
Eli Lilly has spent the last two months 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 Lilly's neckline, which is down at $79. That breakdown got confirmed with yesterday's second subsequent close below $79.
With that neckline level violated, downside is the high-probability trade for Lilly in the near-term. The upside for investors is that this is a relatively short-term setup - and that comes with equally short-term trading implications. Lilly's pattern comes with a downside price target of $73, a price that coincides with the support level made back in June. If you're looking for a buying opportunity in Eli Lilly, wait for shares to catch a bid at that $73 price floor before trying to jump in. Until then, this stock looks toxic.