The stock market has only fallen a few percentage points in the past week, but the backdrop for stocks seems to have changed considerably. Coming off of the momentum-driven, Fed-fueled market action of 2013, investors now find themselves in an environment in which risk has moved back to center stage, and many are looking for stocks to sell.
A series of tepid earnings reports, the growing instability in China, and the collapse in several emerging market currencies are among the issues that have disrupted the market so far in 2014. Investors who witnessed the emerging markets crises in 1994 and 1998 know that although much has changed in the past 15 years, trouble in emerging world has a way of landing on our doorstep in dramatic fashion.
As a result, the name of the game is now protecting against downside rather than taking on added risk in search of incremental returns. Investors need to keep a close eye on their holdings to see what stocks might be particularly vulnerable if the market continues to trend lower in the weeks ahead.
With this in mind, here are five stocks to sell before the next adverse headline hits the tape:
Stocks to Sell #1: iShares MSCI Japan ETF (EWJ)
Click to Enlarge In 2013, Japan’s stock market benefited enormously as the Bank of Japan’s aggressive quantitative easing policy fueled weakness in the yen and provided a tailwind to exporters.
Now, the opposite trend might be set to occur.
When investors go into “risk-off” mode, the yen typically strengthens — a trend that indeed has begun to emerge in the past week. The potential impact of the stronger yen is visible in the underperformance of exporters such as Toyota Motor (TM) and Sony (SNE). These worries contributed to a sharp, 4.7% selloff in the iShares MSCI Japan ETF (EWJ) in just the three sessions ended Monday.
Now, the EWJ chart indicates more weakness might be on the way. The ETF has broken through both its long-standing lower support line and its 200-day moving average, and it stands to fall further if there is any additional weakness in risk assets. Another potential catalyst for a downturn is the increase in the national sales tax, set to go into effect April 1.
If you’re fortunate enough to have ridden the gains in EWJ during the past year, it’s time to pull the plug.
Stocks to Sell #2: Symantec (SYMC)
Click to Enlarge With the broader market appearing to be at an inflection point, this isn’t the time to take chances on stocks that are in potentially dangerous technical positions.
Exhibit A on this front is the security software provider Symantec (SYMC). There’s nothing wrong with the company fundamentally — earnings estimates are on track and it’s trading at a very reasonable 12.1 times forward earnings. However, the stock price — $23.30 at Tuesday’s close — is sitting near long-standing support at about $22.
This wouldn’t necessarily be cause for concern on its own, but also note that the 200-day moving average has begun to turn lower — a clear sign that momentum is heading in the wrong direction.
Symantec reports after the bell on Wednesday, Jan. 29.
Stocks to Sell #3: AT&T (T)
Like PepsiCo (PEP), Berkshire Hathaway (BRK.B) and General Mills (GIS), AT&T has underperformed in recent months, and it is sitting right above its support. Further, as is the case with Symantec — as well as Pepsi, General Mills and Berkshire, for that matter — the 200-day moving average has begun to turn lower.
AT&T isn’t a short by any means, and its 5.5% yield is likely to dampen the potential downside. Instead, the stock’s technical position argues for a cautious approach — especially in light of the unenthusiastic reception to the company’s earnings report Tuesday.
Given their current chart patterns, there’s no rush to take advantage of the underperformance of defensive stocks such as AT&T just yet.
Stocks to Sell #4: Analog Devices (ADI)
Click to Enlarge Analog Devices (ADI) has been a solid performer in recent years, climbing steadily from its 2011 low. ADI has moved reliably along its trendline in this time period, bouncing off support on multiple occasions.
More recently, however, ADI stock has stalled even as the broader market has powered higher, and it is now within striking distance of both its support line and its 200-day moving average.
ADI stock has been here before and survived, but now it’s testing support with a valuation that’s much higher than it has featured throughout its long march higher. At this level, it won’t take much in the way of broader market weakness to send Analog shares lower. This chart set-up indicates that the time to book profits in ADI is at hand. Earnings are scheduled to be released on Feb. 18.
Stocks to Sell #5: Alcoa (AA)
Click to EnlargeAlcoa (AA) stock has had a great run since October, rising nearly 50% and climbing to its highest level since mid-2011. While this has provided value investors with some much-needed relief, the potential upside is limited from here given the continued weakness in aluminum prices, Alcoa’s declining earnings estimates, and the renewed downturn in the broader mining sector following the emerging-markets instability of the past week.
It’s possible that the problems in the emerging markets turn out to be nothing and global economic growth stays on its recovery track in the months ahead. Further, AA stock continues to look sound technically, having broken out of a broad base and finally seeing an upturn in its 200-day moving average. But with Alcoa already up so much in the past four months, the risk-reward equation has become much less favorable.
Let the stock take a breather here, and look to get back in at a more favorable price.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.