The grind lower continues in the S&P 500 this week - as of Thursday's close, the big stock market index has ended eight consecutive trading sessions in the red, the first time the big index has done that since October 2008. And only the second time it's happened in the last two decades...
As plenty of people have already noted, so far, the declines have actually been pretty minimal. The S&P is only down 2.29% over that eight-day stretch.
But that performance stat doesn't tell the whole story. Once again, the big market averages are masking what's really going on behind the scenes. So, while the S&P isn't down much as a whole in the last eight days, the worst 20% of the big index is down 7% or more as of this writing.
That's a meaningful chunk of the market that's posted some awful performance in the last several trading sessions. And it makes an important point crystal clear: simply not owning the very worst performers could do more for your returns than owning the best ones as we continue down the final stretch of 2016...
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.
Costco Wholesale Corp.
Up first on our list of toxic trades is Costco Wholesale (COST) . It shouldn't come as a huge surprise that Costco isn't a name you want in your portfolio right now: this $63 billion membership warehouse stock has lost more than 10% of its market value since the calendar flipped to January, underperforming the rest of the S&P 500 in a big way in 2016. The bad news is that Costco could have even further to drop following a breakdown this week...
Costco has spent the last month and change forming a descending triangle pattern, a bearish continuation setup that signals the potential for lower ground ahead. The descending triangle is formed by horizontal support down below shares at $147.50, with downtrending resistance to the top-side. Basically, as Costco pinballs in between those two technically significant price levels, it's been getting squeezed closer and closer to a breakdown through its $147.50 price floor. That breakdown finally happened this week.
Relative strength, which measures Costco's performance versus the rest of the broad market, has been an extra piece of evidence against this stock in recent months. Costco's relative strength line has been making lower highs as shares have underperformed the broad market in 2016, and that downtrend in relative strength is still intact here, making this stock statistically likely to underperform going forward. Costco is a stock you don't want to own this fall...
Tesla Motors Inc.
We're seeing the exact same price setup right now in shares of electric car stock Tesla Motors (TSLA) . Like Costco, Tesla has been a serial underperformer in 2016, dropping more than 20% since the start of the year - and now it's testing a breakdown from a descending triangle pattern that would signal the possibility for even more selling. The key price level in play in Tesla right now is $190.
What makes that $190 level in particular so significant? It all comes down to buyers and sellers. Price patterns, like this descending triangle setup in Tesla, 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 $190 support level in Tesla 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 $190 so significant - the move means that sellers are finally strong enough to absorb all of the excess demand at that price level. Right now, shares are just barely below that $190 price floor, but the move isn't material enough to count as a breakdown. If Tesla ends the week below $190, though, we've got a new sell signal in this electric car maker.
Micron Technology Inc.
2016 has actually been an outstanding year for shares of $17 billion memory stock Micron Technology (MU) . Year-to-date, Micron has rallied more than 17%, outperforming the rest of the tech sector in a big way. But after that big up-move, Micron's rally is starting to show some cracks; investors might want to think about taking some of those newly-won gains off the table this fall...
Micron is currently forming a double top pattern, a classic bearish reversal setup that looks just like it sounds. The double top is formed by a pair of swing highs that peak at approximately the same price level; the low that separates those two highs is the line in the sand that, if violated, triggers the sell. For Micron, that's the $16.50 support level that's being tested this week.
Price momentum, measured by 14-day RSI up at the top of Micron's chart, adds some extra confidence to the odds of a breakdown here. Our momentum gauge made a pair of lower highs at the same time its price chart was showing off its double-top pattern. That's a bearish divergence that signals buying pressure is waning in Micron this fall. Once $16.50 gets violated, it's time to sell.
McCormick & Co.
Don't get fooled by the nearly 11% rally that spice and seasoning manufacturer McCormick & Co. (MKC) has pulled off in 2016 - since peaking back in July, this $12 billion food flavorings stock has been stuck in a clear-cut downtrend that's unwinding investors' gains. Between that July peak and today, shares have lost more than 11% of their value. And the selloff looks likely to keep going from here.
The downtrend in McCormick is about as simple as technical price patterns get. The setup is formed by a pair of parallel trendlines that have identified the high-probability range for this stock to remain stuck within. Every test of trendline resistance up at the top of the channel has given sellers their best opportunity to get out before this stock's subsequent leg lower. And shares are retreating from their latest bounce this week.
Waiting for that 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 McCormick.
Last on our list of potentially toxic stocks is defense and aerospace giant General Dynamics (GD) . General Dynamics is another example of a stock that's showing some cracks following some strong upside in 2016. While shares are up 9% in 2016, a classic top pattern is waving a yellow caution flag that the trend could be about to end. Here's how to trade it...
General Dynamics is forming a head and shoulders top, a reversal pattern that signals exhaustion among buyers. The setup 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 breakdown through GD's neckline, down just below the $149 level.
Momentum also signaling downside risk in General Dynamics right now. Our momentum gauge has been making a series of lower highs since the head and shoulders started forming in August, signaling that buying is fading at the same time the bearish reversal pattern is getting close to triggering. If $149 gets violated in November, it's time to sell this big defense stock.