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Sell These 5 Toxic Stocks Before It’s Too Late - views
BALTIMORE (Stockpickr) -- Do you own one of these toxic stocks? If so, it’s time to hit “sell.”
Let me be clear: The S&P 500 looks strong right now, and a number of critical factors are pointing to a sustained rally for 2013. That said, not all names are participating in the upward momentum in stocks. And the ones underperforming the market right now are the same ones likely to stifle your stock performance for the rest of the year.
That’s why today we’re taking a technical look at five namesthat could be toxic for your portfolio this winter.
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 2013.
First up is Amgen (AMGN), the $63 billion biopharmaceutical stock. For the last few weeks, Amgen had been looking bullish -- until shares broke down below support, that is. A failed bullish pattern is generally worse than an outright bearish pattern, and AMGN has been proving that point with its price action for the last few trading sessions.
Amgen had been forming a an ascending triangle pattern, a bullish setup that’s formed by horizontal resistance to the upside at $90 and uptrending support below shares. Ultimately, the selling pressure at support proved stronger than buyers had figured, and when bids disappeared at that support line, this stock went into freefall. In a big way, AMGN is a cautionary tale of why it’s critical to wait for a breakout to actually happen before jumping onboard a breakout trade.
Now AMGN looks likely to resolve further to the downside. Investors looking for an exit should sell now before January 23 earnings hit – while they could put shares back on track, the headline risk coupled with a bearish chart make it too much of a gamble…
BHP Billiton (BHP) has had a stellar run in the last six months, climbing more than 20% over that period while the S&P posted performance that clocked in at around half that. But BHP looks like it’s finally rolling over. Here’s what to watch for in this commodity giant.
BHP is currently forming a head and shoulders top, a price 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, in this case at $76.
Momentum, measured by 14-day RSI, has been in a downtrend since all the way back in December, when BHP first started showing signs of weakness. Since momentum is a leading indicator of price, it adds some significant evidence that BHP could be in for lower levels. On the move below the neckline, I’d recommend keeping a protective stop at $77.
I realize it doesn’t sound like that much of a stretch to call an airline stock toxic. But discount European carrier Ryanair Holdings (RYAAY) is just now starting to show some technical weakness. Investors could get their first distinct sell (or short) signal in Ryanair this week.
Like BHP Billiton, Ryanair has been a strong performer for the last couple quarters – shares of the $11 billion carrier have climbed by more than 32% in those last six months. But Ryanair is showing weakness thanks to a rounding top in shares. Like the name implies, a rounding top looks like an upside down parabola in a stock’s price action. It represents a gradual shift of power from buyers to sellers. In Ryanair’s case, the pattern triggers on a move down through $38.
Momentum is important on this stock as well: RSI had show RYAAY in overbought territory as the calendar flipped over to 2013. Contrary to popular belief, an overbought reading in momentum isn’t a bearish signal in and of itself (overbought stocks statistically tend to go even more overbought in the short-term), but the fact that momentum is rolling over simultaneously is bearish. I’d be looking to take gains on a slip below $38.
Even though Microsoft (MSFT) has gotten hit hard in the last year -- stumbling into the red by more than 8% to underperform the S&P by close to 20% -- it’s signaling that lower ground isn’t out of the question.
Microsoft has been consolidating since mid-November, moving sideways in a rectangle pattern after getting sold off hard from highs of $33 this year. Consolidations are generally good things because they give buyers and sellers a chance to sit back and consider their next moves without the added pressure of a moving target (remember, all price action ultimately comes down to buyers and sellers). But rectangles tend to be continuation patterns, so a breakdown below support at $26.50 is a signal that shares are on their next bear leg.
Listening to price action is critical in this case. After all, if shares can push through resistance, it’s more likely that MSFT has found a bottom.
A downtrend in relative strength (not to be confused with RSI) adds some extra evidence towards a downward ending in this stock. Microsoft continues to underperform the S&P 500 at an increasing rate, and that’s historically a good indicator that more underperformance is yet to come for the next three to ten months.
Last up on our list of toxic-looking names is Regeneron Pharmaceuticals (REGN), a stock that’s currently forming a classic double top pattern in shares.
A double-top pattern is formed by two swing highs that come in at approximately the same price level. They’re separated by a swing low that’s the breakdown level for the pattern – a move below that low triggers the sell signal in shares. For REGN, that sell signal comes on a move below $165.
As a shareholder, it’s important to remember that it doesn’t matter why selling pressure is coming into this stock right now -- the two tops on this chart show us that it is. Now, it’s just a question of whether that newly introduced selling pressure can overcome the holdout buyers sitting below that $165 level. If they do (with a breakdown), then it’s time to exit this stock -- or even bet against it.
If you decide to take the short-side, I’d recommend keeping a stop on the other side of the 50-day moving average.
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.