The days of easy stock picking after the post-election rally are over.
Political headlines and market uncertainty are once again taking center stage, distracting the market. In addition, there are several stocks that have been affected by the migration from dividend-yielding sectors into the industrial and material sectors as the market continues to adjust to the new president’s pro-growth agenda.
Looking at the landscape of the S&P 500, there are a number of stocks that have been affected by the market’s shift and are at risk of relatively dramatic declines over the next six months.
These aren’t small-cap stocks that are full of risk and thus are expected to take serious lumps in a short amount of time. These are widely held blue-chip stocks, including some of the market’s 10 largest companies.
Here’s a look at seven stocks that could see their gains clipped very soon, and our estimates for just how much downside these picks could have.
Portfolio Land Mines: General Electric (GE)
Potential Downside: 16%
General Electric Company (NYSE:GE) hasn’t participated in the rally since topping out in December. A poor earnings performance back in January deserves part of the blame, but the charts had already turned against GE before that report.
Over the past year, General Electric shares are trading 6% lower against an S&P 500 that has returned almost 15%. Despite the vast underperformance, the stock is still considered a buy by 65% of the Wall Street analysts. Expect that number to shrink, which in turn will prompt more selling in GE stock.
Click to Enlarge Technical pain will start to hit the stock on a move below $29. This is just below the level of the 20-month moving average, which is the technical line of demarcation between bull- and bear-market trends for a stock. A break into a bear market for GE will cause the sellers to start coming out in force.
For now, our price target on General Electric is $25.
Portfolio Land Mines: Goldman Sachs (GS)
Potential Downside: 15%
Goldman Sachs Group Inc (NYSE:GS) shares have been lagging the market lately, and in fact are among the worst in the Dow Jones Industrial Average.
Profit-taking was triggered after the March Federal Open Market Committee (FOMC) — while the Fed did hike interest rates, it also started to appear more dovish. This, combined with the uncertainty that the Trump administration will be able to push banking reform through, has Goldman Sachs and other financials transitioning into bearish trends.
Click to Enlarge Goldman’s strength this week was triggered by a dramatic oversold reading from its Relative Strength Index (RSI). In fact, the RSI had reached its lowest levels in more than a year. This aspect of the recent rally indicates that the buying of the past few days is likely just a dead-cat bounce. Translation: GS shares are likely going to reverse again.
From a longer-term perspective, GS is working off an overbought reading from the monthly RSI. That’s right: Goldman Sachs is oversold in the short-term, but overbought in the long-term.
For now, GS should be considered “neutral” to “sell” based on the technicals. The financial giant is lagging its peer group, and it has little technical support to lean on until the shares reach $200.
Portfolio Land Mines: JPMorgan Chase (JPM)
Potential Downside: 10%
JPMorgan Chase & Co. (NYSE:JPM) — another financial stock that has surged since the election — is sitting in long-term overbought territory, suggesting it’s due for a correction.
JPMorgan has spent most of this week bound by the trendline, while volume has been declining. This suggests technical traders are taking a wait-and-see approach and keeping the powder dry.
Click to Enlarge Just overhead of the 50-day moving average is the shorter-running 20-day MA. If the latter collides with the 50-day over the next few trading sessions, it would create double-barreled resistance at $88. That might be too much for JPM stock to overcome.
Short-term trading is turning into negative momentum for JPMorgan shares as we head into a potentially make-or-break earnings season for the bank.
As for the longer-term, our technical models are setting the next line of support at $80 based on round-numbered trading and JPM’s chart activity after the initial post-election rally in November.
Portfolio Land Mines: Alphabet (GOOGL)
Potential Downside: 10%
This “FANG” trade appears to be turning into the “FAN” trade as Alphabet shares are now starting to drop-off in performance.
The average return for Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) shares over the past 12 months is 39%. Alphabet has returned just more than 11% for the same period. GOOGL has turned into a relative strength laggard against the Nasdaq Composite, which has almost doubled Alphabet’s returns for the same period.
Click to Enlarge But Wall Street’s love affair hasn’t stopped. A whopping 93% of the 24 analysts covering the stock rank it a buy. That’s a risk for investors as it suggests Alphabet shares are a “crowded trade” that is priced for perfection.
At the moment, a move below $840 is likely to cause Alphabet shares to accelerate to $800, where we will see some support kick in. Still, our models have turned neutral on their intermediate-term outlook and are transitioning toward being bearish as the price patterns are rolling over.
Bottom line: The continued weakness in Alphabet shares results in a price target of $760.
Portfolio Land Mines: Verizon (VZ)
Potential Downside: 12%
The media and communication sector has been scattering as the industry continues to transition. Verizon had been a market leader in 2015 and 2016 as investors placed higher value on dividend stocks, but that game has changed as interest-rate expectations creep higher.
Verizon Communications Inc. (NYSE:VZ) has suffered selling pressure since topping in July 2016, and it doesn’t appear ready to stop. From an intermediate-term basis, our models have been bearish on VZ since the beginning of the year and currently indicate more selling pressure on the way as Verizon prepares to cross into a bear market.
Click to Enlarge The 20-month moving average for Verizon sits at $48.77, which is exactly where the stock is trading as of this writing. A move below this level will increase the selling pressure and put the stock on the radar of longer-term investors.
The analyst community has already cooled to Verizon. Downgrades have resulted in just 36% of analysts covering VZ doing so with a buy recommendation. But while we typically see this as a bullish contrarian indicator, it’s a problem for Verizon, which needs more analysts to defend or reiterate their outlooks.
The break of $48.77 leads our models to a target price of $43 on Verizon shares.
Portfolio Land Mines: Chevron (CVX)
Potential Downside: 16%
The energy sector has boasted several outperformers as oil prices try to inch higher.
Chevron Corporation (NYSE:CVX) hasn’t been one of them.
What had been a yield play for many investors has turned into a drain on portfolio values. Chevron is trading roughly 8% lower for the year. More worrisome than the year-to-date performance, though, is Chevron’s technical situation. The daily activity has now seen a bearish cross of the 50- and 100-day moving averages, and a “death cross” is in the near-term future based on the stock’s poor performance.
Click to Enlarge We’ve seen the technical traders begin to bail. Volume has been increasing as CVX has been in the process of breaking below its 200-day moving average. From here, a break below this trendline will accelerate the stock into a move to the $95 area. After that, it will face breaking into a bear market.
A whopping 78% of analysts covering the stock have it ranked a buy, so unless a turnaround occurs quickly, we expect downgrades to add pressure to the situation.
Investors should be braced for Chevron prices to $90 over the next six months.
Portfolio Land Mines: Exxon Mobil (XOM)
Potential Downside: 15%
The focus on domestic oil production is affecting the larger oil companies’ participation in any of the energy trade, and they don’t get bigger than Exxon Mobil Corporation (NYSE:XOM). Over the past 12 months, Exxon Mobil shares are flat while the energy sector has returned 13%.
Analysts aren’t defending the stock; only 29% of those covering XOM have it ranked a buy. Again, while we usually like to see a thin bullish analyst crowd, that’s only when shares are outperforming the market. In this case, the analysts are part of the selling pressure.
Click to Enlarge That’s not good.
Exxon Mobil’s chart is concerning. XOM currently is testing its 20-month moving average. A move below this mark will throw the stock into a bear market, increasing selling pressure from the technical traders.
XOM trades around $82, and the downside risk for Exxon Mobil extends to $70.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
