Corrects from 6:01 a.m. EST on Nov. 18 to show percentage by which WPP is down for the year.
It's been hard to miss the upside in the stock market since the black clouds of the U.S. presidential election got lifted last week. In the ten-day stretch since Donald Trump became president-elect, the S&P 500 has rallied 4.9%, sending the big market average back within a percentage point of all-time highs.
But, as auspicious as those headline stats seem at first, they're masking something that's been taking place beneath the surface...
You see, one in five S&P components is actually down in the last ten days. And of those, nearly half are underperforming the S&P 500 by 10% or more in that timeframe. Put simply, a consequential chunk of the S&P is getting pummeled behind the scenes right now - and that means the odds are pretty good that you may even own one of these "toxic stocks".
Luckily, the antidote is pretty straightforward: 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...
So, 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.
Leading off the list of potentially toxic stocks today is $27 billion advertising and marketing giant WPP plc (WPPGY) . So far, 2016 has been a pretty challenging year for WPP shareholders: As of mid-November, this stock is 8.6% lower than it started the year, trailing the rest of the market by a big margin. Worse, WPP's chart is signaling the potential for lower ground ahead this fall. Here's why.
WPP is currently forming a descending triangle pattern, a bearish continuation setup that's formed by horizontal support down below shares (at $103 in WPP's case), and downtrending resistance to the top-side. Basically, as WPP has pinballed in between those two technically important price levels, this stock has been getting squeezed closer and closer to a breakdown through its $103 price floor. When $103 gets violated, it's time to sell this stock.
At a glance, WPP's chart looks "gappy". Those gaps, called suspension gaps, are caused by overnight trading on the London Stock Exchange. Those price gaps don't carry any technical significance -- but WPP's possible $103 breakdown does. That's good reason to keep an eye on that $103 level if you own this stock.