There are a couple of undeniable facts that are critical for investors to acknowledge in 2017 ...
First, we're in the middle of a rip-roaring bull market. And second, a huge chunk of the individual stocks that make up that market aren't participating in it.
As I write, the S&P 500 is up more than 24% on a total returns basis since last February. But over that exact same timeframe, nearly a hundred S&P components are actually down, underperforming by a huge margin. That's about one in five S&P stocks that's not participating in the new highs that are grabbing the headlines in 2017.
Simply put, a bigger segment of the stock market than most people are willing to realize has been "toxic" for the last year and change. And dozens more are teetering on the edge of major breakdowns as we head deeper into 2017.
That's the bad news.
The good news is that the secret to crushing the S&P 500 this year isn't necessarily in picking out the very best stocks for the year ahead; instead, all you have to do is avoid the very worst ones.
So, to find the stocks to avoid in the final stretch of March, we're turning to the charts for a technical look at four you should consider selling here ...
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 four "toxic stocks" to sell--and when to sell them.
From a technical standpoint, the world's biggest energy company is showing some cracks right now. Exxon Mobil (XOM) has been experiencing a challenging year in 2017, shedding about 10% of its market value since the beginning of January. The trouble for XOM bulls is that shares are testing a key breakdown level this week.
Exxon is forming a descending triangle pattern, a bearish continuation setup that flags the possibility for more downside ahead. The descending triangle is formed by horizontal support down below shares at $81, with downtrending resistance above it. Basically, as XOM bounces between those two technically important price levels, shares have been getting squeezed closer and closer to a breakdown through that $81 price floor. When that happens, we've got a sell signal in Exxon.
Remember to be reactionary when looking at Exxon (or, for that matter, any of the other potentially bearish trades on this list). $81 has acted like a floor for shares since early February, and Exxon doesn't open up outsized downside risk until that price level gets violated. In the meantime, it's waving a red flag for investors ...
Thermo Fisher Scientific Inc.
Meanwhile, the breakdown has already happened in shares of $60 billion healthcare stock Thermo Fisher Scientific Inc. (TMO) . While shares of this big stock have actually been outperforming year-to-date, up 10% since the start of 2017, the chart is signaling that shareholders should think about booking some gains here.
Thermo Fisher has spent the last month and change forming a double top, a bearish reversal setup that looks just like it sounds. The price pattern is formed by a pair of swing highs that peak at approximately the same price level. The sell signal is identified by the intermediate trough that separates those two highs--for TMO's chart, that's the $156 support level, and it just got violated this week.
Price momentum, measured by 14-day RSI in Thermo Fisher'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 January, making lower highs over the course of the double top pattern. Momentum is a leading indicator to price, and the downtrend in RSI creates a bearish confirmation that suggests buying pressure is waning here at the same time shares are violating an important support level at $156. Caveat emptor.
Things are looking pretty straightforward in shares of $14 billion utility stock FirstEnergy Corp. (FE) . Buyers shouldn't be emboldened by the 5% rebound shares have seen in the last month or so--it's a correction in the context of a long-term downtrend. Crucially, you don't need to be an expert technical trader to figure out what's happening on FE's stock chart; the pattern in play is about as simple as they get.
FirstEnergy's long-term downtrend is defined by a pair of parallel trendlines that have identified the high-probability range for shares to stay stuck within. In other words, every time FE has rallied up to test trendline resistance, shares have been unceremoniously swatted lower in reaction. That means, as FirstEnergy's stock price hangs out near the upper bound of its downtrend, it makes sense to sell the next bounce lower ...
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 FirstEnergy.
WellCare Health Plans Inc.
Last on today's list of potentially toxic trades is $6 billion managed care company WellCare Health Plans Inc. (WCG) . WellCare has been a stellar performer in the past year, rallying almost 50% in those trailing 12 months--but shares are start to look "toppy" in 2017. Here's why ...
WellCare is forming a head and shoulders top, a classic bearish reversal setup that signals exhaustion among buyers. The pattern is identified by two swing highs that top out at approximately the same level (the shoulders), separated by a higher high (the head). The sell signal triggers when WCG's neckline gets materially violated--that happens at the $137 price level, a line in the sand that's getting tested today.
It's also worth noting that a violation of WellCare's $137 neckline would coincide with a breakdown through the uptrend support line that's been propelling shares higher for the last year. In short, if that trend line gets crossed, WCG opens up a lot of downside risk--and you don't want to own it anymore.