The S&P 500 is holding onto nearly 7% total returns so far in 2016, strong performance that looks even more one-sided among the top tier of S&P performers right now. As I write, nearly half of S&P components are up 10% or more on a price basis since the start of the year.
Understandably, most of the investor attention in 2016 has been focused on the stocks that are working. But that might be a big mistake. Not owning the wrong stocks might just be more important than owning the right ones as we head toward the final stretch of 2016.
The good news is that some of the biggest potential underperformers are tipping investors off ahead of time this fall…
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 for your portfolio 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.
It's been a rough year for shareholders of Nuance Communications (NUAN) . Year-to-date, this $4 billion voice recognition software stock has shed nearly 30% of its market value. The bad news is that shares could have even further to fall in September, as this stock tests a key breakdown level this week. Here's how to trade it:
Nuance has spent the last couple of months forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares at $14.50, and downtrending resistance to the top-side. Basically, as Nuance bounces in between those two technically significant price levels, this stock has been getting squeezed closer and closer to a breakdown through that $14.50 price floor. Shares essentially closed at that level yesterday, which means they're flirting with a breakdown early in today's session.
There's an extra red flag waiving in the form of relative strength, which measures Nuance's price performance versus the rest of the stock market. Our relative strength line is still holding onto its downtrend from March, signaling the fact that Nuance continues to materially underperform the broad market even now. If $14.50 gets meaningfully busted this week, it's time to sell Nuance.
We're seeing the same exact price pattern play out right now in shares of fabricated metal products maker Valmont Industries (VMI) -- albeit with a twist. Valmont has spent the last few months forming a descending triangle pattern of its own, only this stock's price pattern has been forming up at the top of VMI's recent range rather than the bottom. Even though Valmont's price setup isn't textbook, it's tradable. And shares are signaling lower ground ahead.
We first took a look at shares of Valmont earlier this month. Since then, shares have violated their $130 support level, selling off hard alongside the rest of the broad market last Friday. The breakdown below $130 signals that the buying pressure that's helped to prop shares above that level since early May has been fully absorbed by sellers at this point. From here, shares could backslide to $115 before finding a meaningful support level again.
Since breaking down, shares of Valmont have been consolidating sideways just below $130. That kind of sideways consolidation isn't uncommon after a technically meaningful move like the one we just got last week. Potential VMI buyers should wait for the selling to play out before thinking about getting on the long-side of this stock.
Meanwhile, large-cap oil and gas equipment maker Tenaris (TS) has actually been enjoying a standout year in 2016. So far, this stock has managed to wring out 15% total returns since the calendar flipped to January. But that recent rally is beginning to show some cracks -- and investors should start thinking about taking those gains off the table at this point.
Tenaris is currently forming a double top, a bearish reversal setup that looks just like it sounds. This stock'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 Tenaris, that breakdown level comes in at $25.50 support.
Price momentum is an extra signal that the buying pressure is waning in Tenaris. That's because 14-day RSI, our momentum gauge for shares, 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. Buyers beware.
Sinclair Broadcast Group
It doesn't take much trading expertise to decipher what's happening on the chart of mid-cap TV broadcaster Sinclair Broadcast Group (SBGI) . Since April, this stock has been trending down and to the right in a well-defined range. And now, as shares bounce off the top of their trend channel for the fifth time, it makes sense to steer clear.
The price channel in Sinclair is formed by a pair of parallel trend lines that have corralled 99% of this stock's price action since its April highs. And shares have reacted to those trend lines like clockwork; every test of the top of the channel has given sellers their best opportunity to get out before this stock's subsequent leg lower. So, as shares bounce lower off of trend line resistance in September, it makes sense to sell Sinclair.
Waiting for that 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 Sinclair Broadcast.
Agnico Eagle Mines
Finishing up our list of potentially toxic trades is $11 billion gold stock Agnico Eagle Mines (AEM) . Like the rest of the precious metals mining industry, Agnico Eagle has enjoyed a stellar run in 2016, basically doubling since the first trading session of this year. But a classic reversal pattern on this stock's price chart is sending a warning to anyone who's looking for shares to keep their climb going.
Agnico Eagle 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 Agnico Eagle's neckline, down at $50. Shares are sitting right above that key level this week.
This is another trade where our momentum gauge is adding some extra evidence for a downside move - our 14-day RSI line has made a series of lower highs since the pattern started forming, signaling that buying pressure is waning in this rally. All of that said, it's important to be reactionary with this trade, just like the other charts on the list today. Agnico Eagle doesn't trigger a sell until shares actually violate their $50 support line. Until then, it's a level that gold bulls should be keeping a very close eye on.