That sinking feeling you have about the stock market this winter? It might just be your portfolio.
That's because, despite the fact that the broad market averages are in rally-mode, and despite the fact that the Dow, S&P 500 and Nasdaq pushed their way to new all-time highs just yesterday, there's a very big chunk of the market that's not participating in the upside. Year-to-date, about one in three S&P components are in the red.
We're just six weeks into 2017, and already dozens of the biggest stocks on the market are down 9% or more since January. Put simply, these stocks are toxic for your portfolio right now. And merely avoiding the worst-performing stocks in 2017 could boost your returns far more than owning the very best ones this year.
To figure out which stocks you should be avoiding this month, we're turning to the charts for a technical look at five that could be about to turn "toxic".
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 - and when to sell them.
Molson Coors Brewing
Up first on the list is $21 billion beer stock Molson Coors Brewing Co. (TAP - Get Report) . Molson Coors has been under pressure in the last several months, shedding about 13% since peaking back in early October. For comparison, the S&P 500 is up 8.3% over that same timeframe. The bad news now for beer bulls is that this stock is signaling the potential for a second leg lower in February.
Molson Coors has spent the last two months forming a descending triangle pattern, a bearish continuation setup that's identified by horizontal support down below shares at $95, and downtrending resistance to the top-side. Basically, as TAP bounces in between those two price levels, it's been getting squeezed closer and closer to a breakdown through that $95 price floor. If and when that happens, it's a sell.
TAP has an extra red flag showing up in the form of relative strength, the indicator down at the bottom of the price chart. Relative strength has been making lower highs in shares since October, indicating that this stock is still underperforming in 2017. Buyer beware.
For a good example of what happens when a descending triangle breaks down, look no further than shares of Gilead Sciences (GILD - Get Report) this week. Shares had been forming their own textbook example of a descending triangle heading into 2017 - and the other shoe finally dropped when Gilead reported earnings on Wednesday. Shares are down approximately 14% since this stock initially made our list of potentially toxic trades.
Was Gilead's price performance this week wholly due to the technical picture? No, of course not. Deterioration in the firm's hepatitis C business was the main driver for the drop - but the technical picture had everything to do with the size of the move lower in Wednesday's trading session. And, perhaps more importantly, it sets up the stage for future downside ahead in the near-term. Wondering why?
The $71 support level in Gilead was a place where there has been an excess of demand for shares since October; in other words, it was a spot where buyers were more eager to step in and buy shares than sellers were to take gains. That's what made a breakdown below $71 so significant - the move means that sellers are finally strong enough to absorb all of the excess demand at that price level. From here, look for a continuation of that downside risk as supply of shares outweighs demand in February.
Meanwhile, things have looked pretty strong for shares of insurance and reinsurance giant Chubb Ltd. (CB - Get Report) . This big financial stock is up nearly 20% in the last year, riding a wave of higher sentiment on the prospect of rate hikes from the Fed in 2017. But Chubb investors might want to think about taking some of those recent gains off the table here - Chubb looks "toppy" in the short-run.
Chubb has spent the last couple of 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 top out at approximately the same price level. Those peaks are separated by a low that identifies the breakdown level for the pattern; in Chubb's case, that sell signal comes on a dip below $129.
Price momentum, measured by 14-day RSI in Chubb's chart above, is an extra red flag to pay attention to in this price setup. That's because our momentum gauge rolled over in December, making lower highs on the pair of peaks that make up the double top pattern. Momentum is a leading indicator to price, and the lower peaks create bearish confirmation that suggests buying pressure is waning here. If $129 gets violated, Chubb opens up a lot more downside risk.
The good news is that you don't need to be an expert technical trader to figure out what's happening on the chart of Korean telecom company SK Telecom Co. Ltd. (SKM - Get Report) - this large-cap telco is showing off a price setup that's about as basic as they get. The bad news is that it doesn't look good for SKM bulls...
SKM has spent the last half-year in a well-defined downtrend diving on every test of the top of its price channel stretching back to the end of July. That downtrend is formed by a pair of parallel trend lines that have constrained 99% of this stock's price action over that timeframe. That means, as shares bounce off their sixth test of trendline resistance this week, it makes sense to be a seller.
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 SK Telecom.
Last on our list of potentially toxic stocks is another overseas telecom stock - Paris-based communications company Orange SA (ORAN) . Orange has been showing some signs of life lately - since bottoming back in December, shares are up more than 10%. But it's a little too early to celebrate those gains. Orange is testing reversal territory in the near-term...
Orange is currently forming a head and shoulders top, a setup that indicates exhaustion among buyers. The pattern 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 move through this stock's neckline, currently at $15.10. One important note is that, because of the down-slope in HNP's neckline, that sell signal moves lower as time progresses. In other words, investors who wait too long to shed shares could be in for a much bigger loss.
Lest you think that the goofy-named head and shoulders is too well known to be worth trading, the research suggests otherwise: an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in "profits [that] would have been both statistically and economically significant." That's good reason for ORAN shareholders to keep a close eye on how shares hold up here.