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5 Toxic Stocks You Should Sell in April - views
BALTIMORE (Stockpickr) -- While most investors pop the champagne on the heels of new all-time highs for the S&P 500, not all stocks are looking quite so attractive in April.
In fact, some stocks are looking downright toxic for your portfolio right now. This isn’t a “dartboard market” -- that is, the kind of market where throwing a dart at the financial pages is a successful method of stock picking. That sort of environment only exists where we’re sitting in the midst of a roaring bull market. It’s still very possible to pick a dud right now.
But luckily, the duds are throwing off some signals right now.
One of the biggest is relative weakness -- the stocks that aren’t participating in the across-the-board equity rally are the ones that you need to think about unloading. And the ones that are looking outright bearish are the ones that you need to sell now. Today, we’ll take a look at five "toxic” stocks that you need to be aware of.
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 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 April.
Up first is Foot Locker (FL), the $5 billion shoe and apparel retailer that’s behind more than 3,350 mall-based stores spread across a handful of countries. While Foot Locker’s price performance over the last year has been alright, its more recent trading setups have been looking a lot uglier. Now a descending triangle pattern points to more downside ahead.
The descending triangle is a bearish pattern that’s formed by downtrending resistance above shares and horizontal support below them (in this case at $31.50). Essentially, as FL bounces between those two technically significant price levels, it’s getting squeezed closer and closer to a breakdown below support. When that breakdown happens, traders have a sell signal for this stock.
The triangle in Foot Locker has been setting up since all the way back in the Summer, and that long-term setup means that this pattern has long-term trading implications once a breakdown below $31.50 happens. Until then, there isn’t a high-probability trade to be made.
We’re seeing the same setup in shares of Panera Bread (PNRA) right now.
Like Foot Locker, mid-cap Panera is forming a descending triangle -- in this case with support at $155. The sell signal comes when shares slip below the $155 level that’s acted like a price floor for shares for the past several months.
Whenever you’re looking at any technical price pattern, it’s critical to think in terms of buyers and sellers. Triangles, rectangles, and other pattern names are a good quick way to explain what’s going on in this stock, but they’re not the reason it’s tradable. Instead, it all comes down to supply and demand for shares.
That support line at $155 is a price where there’s an excess of demand of shares; in other words, it’s a place where buyers have been more eager to step in and buy shares at a lower price than than sellers have been to sell. That’s what makes the breakdown below $155 so significant -- the move indicates that sellers are finally strong enough to absorb all of the excess demand above that price level. That’s when you want to sell -- or short -- shares when it happens.
You don’t have to be an expert technical analyst to see what’s been going on in shares of Silvercorp Metals (SVM), a small-cap silver mining stock. Shares of the miner have been trending lower in a channel pattern since all the way back in September, bouncing ever-lower in a high-probability range.
Trend channels are useful for traders because they identify the high-probability range for shares to keep moving within. The trendline resistance level in SVM 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.
If you’re looking for an opportunity to sell, now looks pretty good with shares just coming off of a bounce off of trendline resistance; now, they’ve got the furthest to move down the channel before catching a bid again. If you decide to go short here, I’d recommend keeping a protective stop just above the 50-day moving average.
Blue-chips aren’t immune from looking toxic right now. General Electric (GE) has the distinction of being the biggest name on our list of toxic stocks today. In spite of a 10% rally year-to-date, shares of the manufacturing conglomerate are starting to look “toppy” thanks to a head and shoulders pattern that’s been forming in shares.
The head and shoulders is a price pattern that indicates exhaustion among buyers. The pattern is formed by two swing highs that top out around the same level (the shoulders), separated by a bigger peak called the head; the sell signal comes on the breakdown below the pattern’s “neckline” level, currently right below $23.
Momentum, measured by 14-day RSI, adds some extra downside confidence to this trade. GE’s RSI uptrend broke ahead of its rally back at the start of March, and it’s been trending lower ever since. Because momentum is a leading indicator of price, that points to more downside ahead. The sole saving grace in GE right now is the fact that the downside target from this setup is close-by at $22.25 -- but traders should look out for signs of a broader change-in-trend if the neckline break happens this week.
Last up is Lowe’s (LOW), another big-name stock that’s looking “toppy” right now. Lowe’s has been riding a rising tide of sentiment for anything related to building -- and as the nation’s number-two home improvement retailer, the 20% rally that shares have seen in the last year has been deserved. But a double top pattern in shares makes it look like the uptrend could be coming to an end -- at least temporarily.
The double top is 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, currently right at $36. If shares slip below that price, we’ve got a sell signal for shares.
I still think that building stocks look attractive right now -- and in fact, top rival Home Depot (HD) isn’t looking toxic in April. But it’s important to remember that you can’t fight the tape, and Lowe’s is showing traders some bearish price action 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.