The big stock market indices haven't really gone anywhere this summer. They are have been hovering just shy of all-time highs since May.
While that's just fine for stocks that have already participated in the earlier upside that this market has enjoyed this year, it's a totally different story for the stocks that haven't. Nearly a third of all S&P 500 components are actually lower now than where they started the year. Many of them are down a lot: 1-in-6 S&P components are down 10% or more this year.
Simply put, the key to beating the market this summer isn't finding the very best stocks to own; instead, the key is just not owning the stocks that could drop further from here. To accomplish that, we're turning to the charts for a technical look at three stocks that are about to trigger sell signals (and when you should actually sell them).
Just so we're clear, the companies I'm talking about today are hardly junk -- many of them have strong businesses. That's frankly irrelevant to what happens to their stocks; from a technical 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.
Here's a look at three big stocks that could turn "toxic" for your portfolio in the near term.
Meanwhile, Jim Cramer and the AAP team dig into energy often. Get their insights or analysis with a free trial subscription to Action Alerts Plus.
Walmart Stores Inc.
Leading off the list Thursday is Walmart Stores Inc. (WMT - Get Report) . In spite of all the headlines that online rival Amazon.com Inc. (AMZN - Get Report) has been grabbing for beating out its brick-and-mortar retail rivals, Walmart has actually managed to put out some solid performance this year, It's up more than 9% since January. But now might be time to take those gains off the table -- Walmart is starting to look "toppy."
Walmart has spent the summer months forming a head-and-shoulders top, a bearish reversal pattern that signals exhaustion among sellers. It's 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 the violation of WMT's neckline at the $75 level. Shares are within grabbing distance of that make-or-break level as I write.
Price momentum, measured by 14-day RSI up at the top of Walmart's chart, adds an extra red flag to this setup. That's because Walmart's momentum gauge has made a series of lower highs at the same time it was forming its head-and-shoulders pattern, a bearish confirmation that buyers are losing control of shares. If Walmart materially violates $75 on a closing basis, look out below.
The same exact price pattern is playing out in shares of $63 billion internet video giant Netflix Inc. (NFLX - Get Report) . Netflix is another stock that's showing cracks after a strong start to 2017 - shares are up more than 20% as I write, but they're teetering on the edge of a breakdown here. Like Walmart, Netflix's price chart is showing off a clear example of a head-and-shoulders pattern. For this stock, the breakdown level to watch is support down at $145.
An early warning of sorts for NFLX was the uptrend that had been propelling shares higher since December's lows -- that trend line was violated at the end of June, and shares have effectively continued to sell off without a break since that move occurred. That change in trend could potentially add to the downside potential of the pattern that triggers below $145 in NFLX.
At this point, Netflix's fate isn't sealed -- but shares are very close to triggering a sell.
Honda Motor Co. Ltd.
Unlike the other two stocks we've already looked at, Honda's price action has been struggling in recent months. Shares are down nearly 7% since the start of the calendar year, and they're down more than double that from Honda's February highs. The bad news is that a bearish continuation setup could trigger more downside in this stock.
Honda is currently forming a descending triangle pattern, a continuation setup that signals a potential second leg lower. The pattern is formed by horizontal support down below shares at the $27.25 level, with downtrending resistance to the topside. A breakdown below that $27.25 price floor opens up Honda to more downside risk.
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