- 2 Health Care Stocks to Watch
- 4 Stocks Spiking on Big Volume
- 3 Stocks Rising on Unusual Volume
- 4 Stocks Breaking Out on Big Volume
- 5 Hated Earnings Stocks You Should Love
5 Toxic Stocks You Should Sell - views
BALTIMORE (Stockpickr) -- Buying stocks is the easy part of the investment game; the hard part is knowing when to sell.
It's been quite a run in 2013. Since the first trading session of the new year, the S&P 500 has climbed close to 16% higher. But with close to half a year ahead of us before we close the books on 2013, that breakneck pace isn't sustainable forever. The question is when and how we'll correct. Will it just be a slowdown or a more significant price crash?
The answer is going to depend largely on the individual names you own. While some names with more robust relative strength will continue to plow higher, weaker names are starting to show cracks. That's why today we're taking a closer look at five "toxic" stocks you should sell.
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.
Martin Marietta Materials
It's been a pretty lackluster year for shares of Martin Marietta Materials (MLM). The $5 billion construction product maker is up a whopping 2.7% since the start of 2013, underperforming the broad market by a big margin. But that's not what makes MLM look toxic right now. Instead, there's a new technical setup weighing on shares this summer.
MLM is forming a head and shoulders top, a bearish reversal pattern that indicates exhaustion among buyers. The head and shoulders 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, which is right above $95 at the moment. A sustained drop below that $95 level is the major sell signal for this stock.
MLM has been forming this setup in the long term, a fact that points to long-term trading implications when and if the setup triggers. If you decide to go short MLM on the breakdown, I'd recommend keeping a protective stop on the other side of the 50-day moving average.
We're seeing the exact same pattern in shares of Eagle Materials (EXP), a $3 billion cement stock. This trade is just a little further along. That's not too surprising -- MLM and Eagle operate in the same business, so they're likely to correlate highly with one another. But whatever the reason, EXP is providing us with another long-term sell signal this summer.
For EXP, the neckline level is right above $65 right now, a price that shares pushed below at the end of last week. Today, we're seeing confirmation that EXP buyers couldn't hold shares up above that last-resort support level at $65. That makes EXP a sell right now. Momentum adds some extra evidence to Eagle's downside bias -- RSI has been in a long-term downtrend since before the head and shoulders started forming.
Lest you think that the head and shoulders is too well known to be worth trading, the research suggests otherwise. 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." If you decide to bet against Eagle, keep a tight stop in place.
Agrichemical giant Monsanto (MON) is another name that's looking toxic to your portfolio. Monsanto is effectively flat on the year, after dancing around in a pretty narrow range since the beginning of January. With shares popping out of the downside of that range, investors should brace themselves for more downside from MON.
Monsanto spent the last few months forming a descending triangle pattern, a price setup formed by downtrending resistance to the upside and horizontal support below shares at $98. Basically, as MON bounced in between those two technically-important price levels, it was getting squeezed closer and closer to a breakdown below $98 support. When that happened at the start of this month, we got an initial sell signal. More recently, a consolidation right underneath newfound resistance is giving traders a second chance to exit shares.
Small consolidations -- or even retracements back to previous support -- aren't uncommon after technically significant moves. In fact, they're typically seen as confirming moves, since MON's pop back up to $98 verified to sellers that the stock was now unable to catch a bid at higher levels. If you haven't already sold MON in 2013, now's your chance.
AAON (AAON) looks "toppy" right now. Shares of the heating and air conditioning stock have been the exception to the other names we've looked at today -- this stock has enjoyed supercharged performance in 2013, rallying more than 74% from the start of January. But that sprint could be coming to an end.
That's because AAON is currently forming a double top, a price setup that's formed by two swing highs at the same level -- a move through $21.50 support signals that AAON is toxic and it's time to sell. That doesn't mean that this stock's outcome isn't a foregone conclusion from here; a move above those $26 previous highs negates the downside setup.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Double tops, triangles, 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 $21.50 is a price where there had been an excess of demand of shares; in other words, it's a place where buyers were more eager to step in and buy shares at a lower price than sellers were to sell. That's what makes a breakdown below $21.50 so significant -- the move would indicate that sellers are finally strong enough to absorb all of the excess demand above that price level. Wait for that indication before you sell.
Gold prices have gotten shellacked in 2013, but they still haven't fallen as far as shares of the firms that mine the yellow metal. Newmont Mining (NEM) is a good example of the trajectory that mining firms have seen year-to-date: Shares have shed 31% over that time period. And the chart doesn't point to an end -- at least not yet.
You don't need to be an expert technical analyst to figure out what's going on in shares of NEM. This stock has been in a well-defined downtrend since last year, hitting its head on the same resistance level five times now on the way down. The most recent attempt higher came late last week, only to get smacked back down yesterday. With shares bouncing off support, the high probability trade is to bet against NEM for a move back down the channel.
Shorting gold and gold miners has been a lucrative strategy so far this year. If you're looking to enter a short position with NEM, consider keeping a stop just above its most recent swing high at $33.22. That price marks the upper bound of Newmont's downtrend.
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