Time to Get Defensive
The stock market is clearly on the defensive as we enter the summer months. The S&P 500 closed out May by penetrating a support zone that has held since February, as well as the intermediate trendline at about 1,305. Additionally, it broke its 100-day moving average.
Any of these reversals would be significant, but as a group they are a clear signal that stocks will likely head for the next support area, which is at the March low and the 200-day moving average, both at 1,250.
The names on this month’s list of stocks to sell are breaking down and headed for an even steeper dive this summer. Option traders can embark on defensive strategies like selling covered calls, or more aggressive bearish strategies like purchasing put options or short selling. But for buy-and-hold investors who do not feel like suffering through losses in upcoming months, the following are stocks to sell:
Stock to Sell #1 – Arch Coal (ACI)
Arch Coal (NYSE: ACI) reduced its estimated 2011 volume projections saying that coal production would fall for the full year. Analysts are projecting that global coal prices will also weaken, and S&P’s rates ACI a “two-star sell.”
Technically, ACI has broken down, and last week’s closing price puts it in a bear market. In April, the stock fell through its intermediate support line from a compound top. In May, it failed to hold at its 200-day moving average, slicing through it on very high volume. Sell ACI now or into any rally. The downside target is $22 within 60 days.
Stock to Sell #2 – Fifth Third Bancorp (FITB)
Cincinnati-based financial services company Fifth Third Bancorp (NASDAQ: FITB) operates four divisions: commercial banking, branch banking, consumer lending and investment advisory. In mid-May, several research firms lowered their ratings on regional banks noting high rates of foreclosures, the competitive squeeze in lending and higher regulatory burdens. FITB was one of those banks cited as being subject to higher non-interest expense and lower income forecasts.
The stock’s 20-day and 50-day moving average broke the 200-day moving average in May for a strong sell signal. If the support at $11 to $12 fails to hold, Fifth Third could plunge into the single digits since a break in that support zone would confirm a double-top breakdown and a new bear market. Sell FITB at market.
Stock to Sell #3 – Kellogg Co. (K)
Blue chip Kellogg Co. (NYSE: K) is suffering from increased commodity costs and a sluggish economy. Insiders have been regular sellers of the stock, and S&P recently reduced their opinion to a “three-star hold.”
Technically, Kellogg closed under its 50-day moving average in late May, and appears headed to its 200-day moving average at $52. But a break under $52 could result in a major decline to the low $40s by year-end.
Kellogg is a company with solid management, so if the economy turns up, we will consider buying back the shares of this major cereal producer. Long-term holders of K should consider writing the K Jan 2012 55 Calls for $2.50, which would provide additional income and protection to just above the 200-day moving average at $52.
Stock to Sell #4 – Lowe’s Companies (LOW)
Building supply, lumber and hardware retailer Lowe’s Companies (NYSE: LOW) has fallen on hard times. With home equity loans hard to come by and weakness in the housing industry continuing, several research firms have reduced their rating on the retail hardware sector including Lowe’s.
Technically, the stock broke both its intermediate trendline and its 200-day moving average in March. Insider selling and very heavy institutional selling make this stock a prime candidate for a further major sell-off. Sell on any rally to the 200-day moving average. The initial target is $20, but the stock could fall to the mid-teens by year-end.
Stock to Sell #5 – Pier 1 Imports (PIR)
Specialty home furnishings retail chain Pier 1 Imports (NYSE: PIR) operates over 1,000 stores in the United States, Canada and Puerto Rico. In May, S&P reduced their rating to a “two-star-sell” based on “lackluster long-term growth prospects.”
The stock’s price broke its 50-day moving average late in the month and the stochastic flashed a sell signal. PIR could find some support at its intermediate trendline at about $10. But selling pressure could drive the stock below support at $9 and then to $7. Sell PIR at market. The stock is also a short-sale recommendation, but be sure to check with your broker regarding the terms of short sales and use a stop-loss order to protect against unlimited losses.
