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5 Toxic Stocks to Sell in November - views
BALTIMORE (Stockpickr) -- Do you own any toxic stocks right now?
If you do, those names could be sabotaging your returns just as the market comes off a correction this month. Take a quick look at any chart of the S&P 500 over the last few months, and it's clear that we've been in a pretty significant rally since the start of the summer --toxic stocks are the names that aren't participating anymore. That lack of upward mobility should be a big red flag for investors right now.
That's why, today, we're taking a technical look at five names that could be toxic for your portfolio this Fall...
To be fair, the companies I'm talking about today aren't exactly "junk."
I mean, they're not next up in line at bankruptcy court -- and, in fact, I even like a couple of this week's names fundamentally. But that's frankly irrelevant; from a technical analysis standpoint, they're some of the worst positioned names out there 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 this Fall. 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.
So, without further ado, let's take a look at five "toxic stocks" you should be unloading in November.
It's been a stellar year so far for Oracle (ORCL) -- shares of the $150 billion database software giant have rallied more than 21% since the first trading day in January. But the same can't be said for the last couple of months: Oracle has stumbled around 8% from its highs back in September. And now, shares look likely to continue their orderly decline.
That's because Oracle is currently forming a head and shoulders top. The head and shoulders is probably one of the most well known technical setups out there; it's formed by two swing highs (the shoulders) that are separated by a higher high (the head). The sell signal comes on a move through the neckline level. Despite the popularity of the pattern, it still works: a recent 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."
Ultimately, ORCL needs to break the neckline for the sell signal to trigger, but even in the best case, this stock has switched from moving higher in an uptrend to slugging lower in a downtrend. Either way, this isn't a stock that looks attractive to own right now, and momentum has indicated that since the uptrend broke back in early September. Opportunistic buyers should wait for a change in trend before putting their money on the line.
Small-cap financial services firm Kemper Corporation (KMPR) is another name that started the year off strong, only to turn toxic for shareholders in the last few months. For this stock, the red flag is coming from a descending triangle pattern.
Basically, the descending triangle is formed by the combination of horizontal support below shares and downtrending resistance above them. As KMPR bounces in between those two technically important price levels, it's getting squeezed closer and closer towards a breakdown below support. The support level to watch in Kemper is $30.30 -- that's our sell signal for this stock.
While it may seem anti-intuitive, trading volume over the course of this pattern adds some extra evidence that the setup is worth heeding. When the breakdown below $30.30 happens, we'd expect to see volume spike higher as sellers flood the market with shares.
Telefonica Brasil SA
The exact same descending triangle setup is showing up in shares of Brazilian telecom giant Telefonica Brasil SA (VIV). Just like the setup in KMPR, VIV is showing a downtrending resistance level above shares and a horizontal support level below them, right at $21.40. The sell signal comes when that price level gets broken.
Whenever you're looking at a technical setup, it's worth thinking about it in real terms -- after all, "triangles" and other geometric shapes don't have some magical powers on a stock chart, they're just easy ways of describing what's going on. In Telefonica, horizontal support at $21.40 is a price below which there's historically been a glut of buying pressure. In other words, it's a price where buyers have been more eager to buy shares cheaply than sellers have been to sell them. But the downtrending resistance level above shares indicates that sellers do have some control of shares at higher prices that buyers aren't willing to shell out for (thus the lower highs).
A breakdown below $21.40 means that those sellers were able to absorb all the excess buying pressure that used to exist at $21.40. That's why it makes sense to be a seller on that move -- with a major price floor taken out, VIV has a high probability for more downside. Until that happens, selling looks premature.
Kimberly Clark (KMB) looks like it's topping right now. Yes, shares of the $32 billion paper product company have made some respectable returns this year, up more than 13% on top of a 3.6% dividend yield. But as they start losing momentum, KMB is starting to look toxic -- here's what you need to know.
Right now, Kimberly Clark is forming a pattern called a double top. As the name implies, it's formed by two tops that hit their head right around the same price level. The sell signal comes when shares drop through the trough that separates the two tops -- in KMB's case, that trough comes in right at $82. Shares have been consolidating above that $82 level for the last week or so, staging a bounce off of the line on their last test of it. Even so, the bounce looks weak, and shares are coming back down to look for buyers again. If KMB can't catch a bid on this attempt, I think we'll see a breakdown.
I mentioned that momentum has been waning for KMB. The 14-day RSI line (above the price chart) has actually been trending lower since early May, and it's only been accelerating more recently. Dropping RSI means that prices are increasing at a decreasing level -- and since momentum is a leading indicator of price, the downtrend adds some important confirmation that a drop is likely.
Ultimately, price is the purest trading signal. A break below $82 means that there aren't enough buyers there anymore to counter selling pressure -- that's the short signal.
Last up is Perrigo Company (PRGO), the $11 billion pharmaceutical and nutritional firm. Like Kimberly Clark, Perrigo is forming a double top, but unlike the paper giant, things don't look quite as bleak for this OTC pharma company. Most significantly, while shares are forming a textbook double top, the uptrend (the dashed lower line) is still intact in shares. That doesn't mean that PRGO isn't a toxic stock, but shares may get a reprieve.
That said, it's important to know when that outlook changes -- and for Perrigo, it won't take long for this stock to give investors an answer one way or the other. From the standpoint of the double top, the sell (or short) signal comes on a break below $105. A breakdown below the downtrend would happen well before that, with shares testing trendline support this week.
If Perrigo is able to catch a bounce off of support, I'd recommend staying away until it can clear $120 -- those two tops show that there's considerable selling pressure up there right now, and the risk-reward doesn't make sense until it gets absorbed by less discerning buyers. Otherwise, the drop through $105 looks like a solid short-side trade setup for the next month.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
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.