5 Toxic Stocks to Sell Before It's Too Late

Don't let the recent sideways grind in the broad market fool you. All things considered, 2016 is shaping up to be a great year for stock market investors.

Year-to-date, the S&P has climbed 7.8% higher on a total returns basis, putting the big index to end the year up almost 12% if that pace continues. And perhaps even more important from an investor sentiment standpoint, the S&P 500 has managed to repeatedly hit new all-time highs this summer, a feat that the index sits only a percentage point away from doing again as I write.

So yes, on the whole, 2016 has been a great year for stocks.

But that doesn't exactly tell the whole story. While the averages are faring well this year, a big chunk of the individual stocks that make up those averages aren't. Their toxic performance is being masked by big upside moves from big, prominent stocks. It's not a small phenomenon, either. As of yesterday's close, 156 S&P components are down in 2016. That's almost a third of the index.

And while many stocks look likely to plow their way to new highs in September, a meaningful chunk of stocks looks downright toxic to your portfolio.

To figure out which stocks to steer clear of, we're turning to the charts today for a technical look at five stocks that could be toxic to own in the month ahead.

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.

Chipotle Mexican Grill

Leading things off is restaurant chain Chipotle Mexican Grill  (CMG) . After spending years as Wall Street's darling in the restaurant business, Chipotle has posted some abysmal performance in the last year, dragged lower by foodborne illness outbreaks in 2015. In those trailing 12 months, Chipotle has lost 42% of its market value. The problem for shareholders is that shares are now teetering on the brink of a technical breakdown in September.

Chipotle has spent the last several months forming a textbook example of a descending triangle pattern, a bearish continuation pattern that's formed by horizontal support down below shares (at $390 in Chipotle's case) and downtrending resistance to the top-side. Basically, as Chipotle's share price bounces in between those two technically important price levels, it's been getting squeezed closer and closer to a breakdown through its $390 price floor. When that support level gets violated, it opens up a lot more downside risk.

Relative strength, which measures Chipotle'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 early this year, signaling the fact that this Chipotle continues to materially underperform the broad market even now. As long as that relative strength downtrend remains intact, Chipotle is a stock you don't want to own.

Valmont Industries

We're seeing the same pattern right now in shares of metal product maker Valmont Industries  (VMI)  -- albeit with a bit of a twist. Like Chipotle, Valmont is currently forming a descending triangle pattern. But unlike Chipotle, Valmont's setup is showing up at the top of its recent range, not at the bottom of a selloff, as is normally the case.

While the price action in Valmont may not exactly be textbook, it's tradable. This stock becomes a sell if shares violate $129 support.

What makes that $129 level in particular so significant? It all comes down to buyers and sellers. Price patterns, like this descending triangle setup in Valmont Industries, are a good quick way to identify what's going on in the price action, but they're not the actual reason it's tradable. Instead, the "why" comes down to basic supply and demand for shares of the stock itself.

The $129 support level in Valmont 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 $129 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 in the sessions ahead.

Oneok Partners 

Meanwhile, 2016 has been a great year so far for shares of natural gas stock Oneok Partners  (OKS)  . So far, shares are almost 30% higher than when they started the year, and that doesn't even factor in Oneok's whopping 8.1% dividend yield. But it might be time for shareholders to start thinking about taking some of those recently-won gains off the table; Oneok Partners is looking "toppy" here.

Oneok Partners is currently forming a double top, a technical reversal pattern that looks just like it sounds. Oneok's price setup is formed by a pair of swing highs that peak at approximately the same price level. The sell comes on a breakdown through the low that separates those twin highs. For Oneok, that breakdown level comes in at $39 support, a price level that's getting tested this week.

Remember to be reactionary with the Oneok trade -- or with any of the other price setups on our list. Technical analysis is a risk management tool, not a crystal ball. That means that stock doesn't actually trigger a sell signal until that $39 price floor gets materially violated first. Until then, shareholders should keep a close eye on things, but it's a little early to unload shares.

Fastenal

The price action is looking pretty clear-cut in shares of industrial supply giant Fastenal  (FAST) . Since shares peaked back in the first quarter of this year, this stock has been bouncing its way lower in a well-defined downtrend. From here, it makes sense to sell the latest bounce lower.

Fastenal's downtrend is formed by a pair of parallel trend lines that have contained all of this stock's price action for the last six months now. 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 seventh time this week.

Waiting for this most recent 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 Fastenal.

China Mobile

Last up on the list of potentially toxic trades is $251 billion Chinese telco China Mobile  (CHL) . China Mobile has been in rebound-mode in 2016, pushing its way almost 20% higher off of its January lows. But now, shares are starting to look "toppy," thanks to a classic reversal setup that started forming at the end of July.

China Mobile has been forming a textbook example of a head and shoulders top, 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 China Mobile's neckline, which is down at $60. If shares violate that $60 price floor, we've got a sell signal.

Price momentum is an extra red flag to watch in China Mobile 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. If $60 gets violated, you don't want to own this stock anymore.

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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