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5 Toxic Stocks to Unload in June - views
BALTIMORE (Stockpickr) -- Make no mistake, U.S. stocks are in a correction right now.
After a breakneck rally in May, equity markets are taking a breather and retracing some of the massive move. And from my vantage point that's just fine for stock bulls as we approach June. The rally we've been in the midst of since November has been replete with corrective action; it's why this rally has been so healthy and sustainable since it kicked off.
It's also why stock indices have been able to keep moving higher, much to the confusion and dismay of short sellers. A corrective setup in the S&P 500 on Friday put in a price target at 1,625, a price that's just a few points away from yesterday's lows. We'll see today whether that level gets tested again.
But to be clear, not all stocks look corrective right now. Some look downright toxic for your portfolio. It makes sense to unload those names as we approach the stock market's "slow season" this summer.
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. 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 summer. 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.
First up is mid-cap agribusiness and ocean transportation firm Seaboard (SEB). While this stock's four-digit price makes it fairly unique -- and quite light in volume -- a bearish trading pattern could make this high-priced name a lot less high-priced in the near-term.
That's because SEB is currently forming a descending triangle, a trading setup that's formed by a horizontal support level below shares (currently at $2,640) and a downtrending resistance level above the stock's recent price action. Basically, as SEB gets bounced in between those two technical price levels, it's getting squeezed closer and closer to a breakdown below support. When that happens, we've got a sell signal in this stock.
SEB's high price and relative lack of volume (for its market cap) could add fuel to the fire in this setup. While more bullish trades need volume in order to play out, downside trades can actually make moves lower because of a lack of trading volume.
Seaboard is testing support recently. I'd recommend keeping a close eye on this stock.
We're seeing the exact same price action right now in Universal Display (PANL), a small-cap stock that develops OLED display technology. PANL's price and trading volume are far more normal than Seaboard's, but the trading implications are the same here. This stock has its horizontal support level at $28. A move below that price is the sell signal for shares.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Triangles, double tops, and other pattern names are a good quick way to explain 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 support level at $28 is a price where there has been an excess of demand of shares; in other words, it's a place where buyers are still more eager to step in and buy shares at a lower price than sellers are to sell. That's what makes the breakdown below $29 so significant. The move would indicate that sellers are finally strong enough to absorb all of the excess demand above that price level.
Momentum, measured by 14-day RSI, adds some extra confidence to PANL's setup: it's been in a downtrend since the pattern started. Because momentum is a leading indicator of price, that ramps up the potential for a breakdown.
One thing's for sure: You don't have to be an expert market technician to figure out what's going on in shares of Cenovus Energy (CVE). One glance at its chart will likely do. CVE is currently stuck in a downtrending channel, a well defined trading range that's bounded on the upside by a resistance line that's helped to push CVE down more than 10% year-to-date.
Even though CVE is up 8% since late April, this stock is only moving up within a bigger bearish context. Now, CVE is staging another bounce off of resistance. That's when it makes sense to be a seller.
Trend channels are valuable for traders because they identify the high-probability range for shares to keep moving within. The trendline resistance level in CVE has acted as a ceiling for shares the last six times it's been tested, and that pattern doesn't look likely to change now. I'd recommend selling (or going short) on the next bounce lower just keep a tight protective stop in place...
Even though gold bugs are starting to build more confidence in their favorite metal, most gold miners are continuing to look toxic right now. A perfect example comes from Yamana Gold (AUY), a $9 billion gold producer that's been shellacked in 2013. Year-to-date, Yamana has lost more than 30% of its market capitalization. And right now, the price pattern in play is the exact same downtrending channel that we're seeing in CVE.
While Yamana hasn't quite hit its trendline resistance level yet, it's not far off from a trendline that's slapped share prices back down the last six times it's been tested. I wouldn't be too optimistic for a trend reversal on attempt number seven. More significantly, AUY made lower lows in mid-May when spot gold was bouncing off of support; that negative relative strength versus gold makes it clear that even if the metal does move up from here, miners can still stay in purgatory.
Momentum has had a resistance level of its own over the course of this downtrend, hitting it head right around 60 slightly ahead of each trendline bounce in AUY. I'd recommend keeping an eye on that RSI level. It should act as an early warning sign for the next bounce lower in AUY.
Procter & Gamble
Last, but far from least, is Procter & Gamble (PG), a stock that's been getting more attention that normal lately, after shareholders (including Bill Ackman) pushed for a change at P&G's CEO suite. But the technicals suggest that Procter's price action is weaker after the recent shakeup. Here's why.
Procter & Gamble is currently forming a double-top pattern, a setup that's formed by two swing highs that hit their heads at approximately the same price level. The sell signal comes on a breakdown below the near-term support level for shares, which is right at $77. Shares are sitting just above that price level this morning. Investors looking to enter a position in PG should wait until shares can establish support again.
Procter's death warrant isn't signed yet -- remember, the stock doesn't become toxic until it falls through $77. Still, it's ominously close to that level right now.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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
Follow Jonas on Twitter @JonasElmerraji