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5 Toxic Stocks to Sell in May and Go Away - views
BALTIMORE (Stockpickr) By now, you've probably heard the clichéd expression "sell in May and go away" about a million times. I've said before that I don't think it's good advice for the broad market in 2013 -- but for a small group of "toxic stocks," that trite phrase could be pretty sage wisdom.
Yes, it's true. In spite of a broad market rally that's sent the S&P 500 around 15% higher in 2013, some stocks look toxic right now.
And those names that are underperforming -- or showing signs of a major bearish change in trend -- could drag mightily on your investment returns this year. While a rising tide lifts all ships in a bull market, it also hastens the sinking of the few ships with holes in them.
One of the biggest red flags right now 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 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 in April.
Sonoco Logistics Partners
2013 has been a stellar year for Sonoco Logistics Partners (SXL); shares of the $6.5 billion pipeline business are up more than 26% since the first trading day in January. But it looks like SXL is getting ready to give back some of those gains now.
That's because shares have been forming a descending triangle pattern since early March. The descending triangle is a price pattern that's formed by a horiztonal support level to the downside and downtrending support above shares. Basically, as SXL bounces in between those two technical levels, it's getting squeezed closer and closer to a breakdown below the support level that's been a floor for shares. That happens on a drop through $60.
The relatively fast pace of SXL's uptrend at the start of this year could prove problematic for shareholders if a breakdown below $60 does happen. The stock didn't establish any support between $60 and $50, making the downside potential of the pattern significant. While SXL is trying to shake off the sellers by pushing through resistance, it's been unsuccessful so far. This stock becomes toxic on a print below $60.
Canadian Pacific Railway
Meanwhile, things are starting to look "toppy" at Canadian Pacific Railway (CP), thanks to a double top pattern that's been forming since early March. Like SXL, Canadian Pacific has enjoyed a stellar run so far in 2013, up close to 28% on the year -- and more than 41% in the last six months. But the double top signals a sell in CP on a move through $117.
The double top is a pattern 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 $117. Obviously, CP is still a far way away from falling through that breakdown level at this stage in the game, but it's worth paying close attention to that $117 price at this point. It's the make-or-break level for this high-flying transport stock.
Investors looking to enter a position in CP should wait until shares can establish support again. Canadian Pacific's death warrant isn't signed yet remember, the stock doesn't become toxic until it falls through $117. The breakout above the upper bound of Top 1 negates the downside pattern.
Italian oil and gas company Eni SpA (E) is showing a similarly bearish pattern right now, just in the much longer-term. Eni has been forming a head and shoulders top pattern since all the way back in September, signaling exhaustion among buyers.
The head and shoulders pattern is one of the most popular price patterns -- and for good reason. It's 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 at $44 for Eni. A drop below that $44 level would be a major sell signal for the stock.
I said that the head and shoulders was popular for a good reason; it's not just the funny name. 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." That's good reason to keep a very close eye on Eni in May.
You don't have to be an expert technical analyst to figure out what's going on in shares of Cenovus Energy (CVE). This Canadian oil and gas name has been stuck in a downtrending channel since all the way back in January. Now CVE is staging another bounce off of resistance -- that's when it makes sense to be a seller.
Trend channels are useful 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. Resistance has been a lot stronger than the two mediocre support levels that have stopped price action on the downside, which means that buyers are few and far between even at these lower levels.
I'd recommend staying away from CVE this summer. Sellers are definitively in control of shares at this point.
Last, but far from least, on our list of toxic stocks is Vodafone (VOD), the international cellular phone carrier. VOD has been all over the place in 2013, working its way 17.7% higher on the year through a series of wild swings. More recently, VOD's price action has been a little clearer -- but it hasn't exactly been looking bullish.
A rounding top in shares of VOD points to a bigger drop if shares break down below $29. The pattern indicates a gradual shift in control from buyers to sellers. 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 this stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That breakdown level at $29 is a price where there is an excess of demand of shares; in other words, it's a place where buyers are still been 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 were 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 the bearish nature of the rounding top in VOD's price. The RSI uptrend broke just as VOD's share price topped, and it's been trending lower ever since. Because momentum is a leading indicator of price, that ramps up the potential for a breakdown.
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