BALTIMORE (Stockpickr) -- On the off chance you're just checking in your portfolio after sitting out of the market for the last five months, you haven't missed much.
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Since the calendar flipped to January, the S&P 500 has climbed a whopping 2.4%. Breakneck gains those aren't, particularly when compared to the nonstop rally of 2013. But even those paltry returns are wishful thinking for most investors; while the big indices are sitting just a few points shy of all-time highs, the average stock in the S&P has pulled back double-digits from their highs.
I'm not exaggerating when I say that the biggest gains this year haven't come from picking the right stocks. They've come from avoiding the wrong ones.
And as summer approaches, a growing list of names is looking very wrong. Today, I'll show you five big "toxic stocks" you need to unload before the next leg down.
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Just to be clear, the companies I'm talking about today aren't exactly junk. By that, I mean they're not next up in line at bankruptcy court. But that's frankly irrelevant; 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.
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 planning their stock execution.
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So without further ado, let's take a look at five "toxic stocks" you should be unloading.
Lockheed Martin
Up first is defense contracting giant Lockheed Martin (LMT), a $52 billion name that's been rallying hard for the last year. Over the trailing 12 months, Lockheed is up more than 52%. But the buying frenzy in LMT could be coming to an end thanks to a classic reversal pattern that's been forming in shares since the middle of February.
Lockheed Martin is currently forming a double top, a bearish reversal pattern that looks just like it sounds. The double top is formed by a pair of swing highs that max out at approximately the same price level. The sell signal comes when the trough that separates the two highs gets violated. For LMT, that breakdown level is right at $155. If $155 gets taken out, it's time to be a seller.
Momentum, measured by 14-day RSI, provides some foreshadowing for downside in LMT. While price was steady over the two tops in this stock, our momentum gauge failed to do the same. That's a big red flag. Short sellers should keep a protective stop at the 50-day moving average.
Gentex
Mid-cap car component maker Gentex (GNTX) is another name that's looking toxic this week -- only that's nothing new for this stock in 2014. Shares of GNTX have been making their way lower all year, dragged down by weakness in the automotive sector as a whole. But this week, a bearish continuation pattern is pointing to even more downside from here.
GNTX is currently forming a descending triangle, a bearish price setup that's formed by downtrending resistance above shares and horizontal support to the downside at $28.50. Basically, as Gentex bounces in between those two technical levels, shares are getting squeezed closer to a breakdown below that $28.50 price floor; when that happens, we've got our sell signal.
Another indicator, relative strength (not to be confused with RSI), is the side signal that's pointing to downside in GNTX in May. Relative strength has been trending lower since January, indicating that this name isn't just moving lower -- it's also woefully underperforming the broad market in 2014. When $28.50 gets violated, GNTX is a sell.
Thermo Fisher Scientific
You don't have to be an expert technical trader to figure out what's going on in shares of Thermo Fisher Scientific (TMO) -- a quick glance at the chart should tell you just about everything you need to know about where this $46 billion scientific equipment maker is heading in the near-term.
TMO is currently bouncing its way lower in a textbook downtrending channel. The setup is formed by a pair of parallel trend lines: a resistance line above shares, and a support line below them. Those two lines on the chart provide traders with the high-probability range for Thermo Fisher's shares to stay within. When it comes to trend channels, up is good and down is bad; it's really as simple as that. And as shares bounce off of trend line resistance for a sixth time in this short span, it makes sense to sell the bounce.
Waiting for that move down before clicking "sell" is a critical part of risk management, for two big reasons: Ot'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 TMO.
Regions Financial
$14 billion banking stock Regions Financial (RF) is another name that looks toxic to your portfolio in May. Shares of RF have spent the last five months establishing a classical head and shoulders top pattern, an indication that this name could have much lower ground ahead of it. And now, Regions' bears are getting a second chance at a low risk entry to bet against shares.
The head and shoulders pattern is a setup that indicates exhaustion among buyers. The setup 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 RF's neckline, which is currently right above $10. That means that the sell signaled in Regions last week.
Since then, shares of RF have pulled back to re-test newfound resistance at that $10 neckline level. While a pullback might look bullish at first, it's actually quite the opposite -- a bounce lower off of that $10 level in the next few sessions serves as confirmation that sellers still outnumber buyers here. If you're looking to short this name, selling the bounce provides a high reward-to-risk scenario.
Northern Trust
Not surprisingly, we're seeing the exact same setup in shares of another banking name: Northern Trust (NTRS). Like Regions, Northern Trust is currently forming a head and shoulders pattern, but the big difference here is that the setup hasn't triggered yet. For NTRS, the sell signal comes on a breakdown below the stock's $58 neckline.
Why the significance at $58? Whenever you're looking at any technical price pattern, it's critical to keep buyers and sellers in mind. Patterns like head and shoulders setups and double tops are a good way to quickly describe what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That horizontal $58 neckline level in NTRS is the spot where there's previously been an excess of demand for shares; in other words, it's a price where buyers have been more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes a breakdown below support so significant -- the move means that sellers are finally strong enough to absorb all of the excess demand at the at price level.
For the best risk/reward tradeoff, wait for the next move lower before selling Northern Trust.
To see this week's trades in action, check out the Toxic Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to
TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.Follow Jonas on Twitter @JonasElmerraji
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