Do You Own One of These 5 'Toxic Stocks'?

So much for the selloff many market watchers were expecting when Donald Trump came out victorious in the election. U.S. markets have been clawing higher in the sessions since the vote, rallying back to within 1% of all time highs for the S&P 500.

But just because Mr. Market survived election day, don't think that stocks are out of the woods just yet in 2016.

That's because, despite the fact that stocks are teetering on the verge of record prices this fall, a very big chunk of this market simply hasn't been working in 2016. Year to date, 172 of the stocks in the S&P 500 are actually lower than they started. Most of those are down a lot -- almost two-thirds of S&P decliners this year are down by 10% or more.

Put simply, it's been very easy to perform a whole lot worse than the top-line stock market stats would have you believe this year.

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.

Genpact 

Up first on our list of potentially toxic trades is $4.7 billion business support company Genpact  (G) . Genpact has been an underperformer in 2016, down 6.8% since the calendar first flipped to January at the start of the year - but this stock's price trajectory actually a lot worse than that. You see, Genpact is actually down more than 17% since shares peaked back in early June. And a bearish technical price setup is signaling the risks of another downside leg this fall.

Genpact is currently forming a descending triangle pattern, a bearish continuation setup that puts Genpact on track for another selloff. The pattern is formed by a horizontal support level down below shares (at $22.75 in Genpact's case), and downtrending resistance to the top-side. Basically, as Genpact bounces between those two technically important price levels, it's been getting squeezed closer and closer to a breakdown through our aforementioned $22.75 support line. If and when that happens, it's time to hit "sell."

It's important to remember to be reactionary with Genpact, or with any of the other technical trades on our list here. Even though the setup looks toxic, the sell signal doesn't actually come until shares violate $22.75 and sellers retake control of this mid-cap stock. For now, Genpact is simply waving a caution flag.

NTT Docomo

We're past warning signs in shares of $88 billion Japanese mobile carrier NTT Docomo Inc. (DCM) . This big telco unwound in yesterday's trading session, breaking through its own descending triangle support level down at $24. That decline opens up a lot more downside risk for NTT Docomo in the final weeks of the year.

What makes that $24 level in particular so significant? It all comes down to buyers and sellers. Price patterns, like this descending triangle setup in NTT Docomo, 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 $24 support level in NTT Docomo 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 $24 so significant - the move means that sellers are finally strong enough to absorb all of the excess demand at that price level. Shares could find some semblance of a bid at $22.50's prior lows, but based on the size of the descending triangle setup in DCM, that's more likely to be a pitstop on the way down than the terminal point in the selloff.

American Tower 

Meanwhile, 2016 has actually been a pretty strong year so far for $47 billion communications site REIT American Tower  (AMT) . Shares are up 10.6% on a total returns basis so far this year, leaving the rest of the S&P far away in its dust. But that rally is starting to show some serious cracks this fall - investors might want to think about taking gains off the table.

American Tower has spent the last several months forming a double top, a 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 American Tower, that's the $107.50 support level, and it got violated with yesterday's close. That means AMT is flashing a sell signal this week.

Price momentum, measured by 14-day RSI up at the top of American Tower'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 American Tower this fall.

Kyocera

You don't need to be an expert technical trader to figure out why $16.7 billion tech company Kyocera  (KYO) isn't the kind of stock you'd want in your portfolio this fall. Shares of Kyocera have evolved their price setup into a shallow downtrend, and that's not changing despite the recent rebound in stocks.

Kyocera's downtrend is formed by a pair of parallel trendlines that have harangued this stock's ability to move higher stretching all the way back to April. 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, opening investors up to more downside risk before November is over. Kyocera's latest bounce is a sell signal.

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 Kyocera.

SAP 

The last stock on our list of potentially toxic trades is tech giant SAP (SAP) , a $103 billion business software behemoth that's been looking "toppy" long-term. We last looked at SAP back at the end of October, when shares were first starting to show off their head and shoulders top. Since then, this stock has dropped by about 4%, violating the neckline level that defines the breakdown in SAP's price chart.

In case you missed it the last time around, the price pattern in SAP is a head and shoulders top, a reversal pattern that signals exhaustion among buyers. The head and shoulders 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 came when SAP's $86 neckline got materially violated.

Now that $86 is in the rear-view mirror, there's still downside risk baked into this stock. Looking at it from a classical technical perspective, the minimum measuring objective signals a price floor down at $79, a level that also happens to coincide with the bottom of the gap that sent shares peaking back in July. If you're looking for a buying opportunity in SAP following the recent rout, it makes sense to continue to steer clear of this stock for the time being.

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

If you liked this article you might like

Why I Absolutely Love One of the Most Despised Sectors Around

Why I Absolutely Love One of the Most Despised Sectors Around

Facebook, Apple, Netflix and Google Have Caught the Flu -- Here's How Not to Get Killed By It

Facebook, Apple, Netflix and Google Have Caught the Flu -- Here's How Not to Get Killed By It

How to Play the Coming 'FANG Flu'

How to Play the Coming 'FANG Flu'

I've Got a New Best Idea for You

I've Got a New Best Idea for You

This Is What Sector Rotation Looks Like

This Is What Sector Rotation Looks Like