Get Out Before the Next Pullback

Just four days prior to the end of Q2, stocks appeared mired in a narrow band between the Dow’s major support at its 200-day moving average at 11,800 and resistance at its 20-day moving average at 12,145. Investors threatened for the third time to plunge the market through its fragile support as they appeared overwhelmed by bad news from Greece and talk that QE3 was unlikely. The media warned of another flash crash.

A 300-point rally that could knock out both the 20-day moving average and exceed the June high at about Dow 12,250 was needed to reverse the threat of a breakdown — a highly unlikely development. But as the EU’s deadline neared, it became clear that Greek lawmakers would have to settle for austerity measures, and then the U.S. economy delivered better-than-expected results. A 648-point Dow rally for the week followed, which advanced the index by 5.4%. However, volume was low with heavy short-covering, and quarter-ending pops are typically driven by institutional “window dressing.”

Investors now have an opportunity to sell stocks that rose late in the quarter but lack valuation support or have outrun their earnings potential. Long-term investors who would rather hold than sell may be able to offset some losses by writing options. Here is your list of stocks to sell for July:

Stock to Sell #1 – Murphy Oil Corp. (MUR)

The energy sector was the top performer in the first half of the year, but Murphy Oil Corp. (NYSE: MUR) lagged the sector, especially in the second quarter when the stock fell 10 points from over $75 to about $66.50 on July 1. A group of five analysts downgraded MUR with one saying that its long-term projects are limited by its low reserve-to-production ratio.

On the chart, a breakdown from a quadruple-top in April, as the stock plunged through its 200-day moving average, has established a technical pattern that even under the best of circumstances will be difficult to overcome. The low-volume rally of the final week of the second quarter resulted in an overbought stochastic and offers investors an opportunity to sell the stock.

Stock to Sell #2 – The New York Times Co. (NYT)

The New York Times Co. (NYSE: NYT) is a diversified media outfit, yet the company, which has holdings in newsprint and paper mills, has not met the challenges of the digital age. Analysts say that operating margins are expected to narrow as newsprint prices increase, and earnings are expected to decline in 2011.

Technically, the stock has been in a decline for over six years. The recent recovery from under $7 to almost $9 does little to change NYT’s technical outlook as it approaches an area of massive overhead resistance.

Stock to Sell #3 – PNC Financial (PNC)

PNC Financial Services Group (NYSE: PNC) recently acquired RBC Bank, which could help the company in the long term, but analysts estimate that the deal will reduce 2012 operating EPS and that the merger won’t break even until 2013. The financial services group has been a drag on the overall stock market this year, but until the second quarter, the regional banks had held steady. In late April, they too turned negative.

Technically, PNC has formed a huge “rounding top” during the past five months, creating overhead that will be difficult for buyers to overcome. Its bullish support line was broken in May, and the stochastic is now overbought.

The recent rally in which the stock recovered from under $56 to almost $61 offers an opportunity to sell. Those who wish to hold could write PNC Nov 62.50 Calls for $2.50 against their position and increase their income by more than 4%.

Stock to Sell #4 – Telefonos de Mexico (TMX)

Analysts anticipate that the fundamental regulatory and rate issues will remain weak this year.

After its breakdown from a double-top in 2007, Telefonos de Mexico (NYSE: TMX) plunged to under $12. But in April 2010, the stock appeared to finally find a bottom and formed a base that ran TMX to over $19. But the base collapsed in May, and the stock fell through its key moving averages before reversing in May at under $16.

The chart below and TMX’s longer-term chart are not encouraging. The current rebound will most likely run aground at its former bullish support line (red dashes) at $17.25. Selling has been heavy and the stochastic will shortly tell us that the stock is overbought. Sell at $17.50 or place a stop-loss order at $15.50.

Stock to Sell #5 – Teradyne (TER)

Although the semiconductor group has been a leader this year, Teradyne (NYSE: TER) has not participated and belongs to a group of stocks to sell on a rebound. One reason for its failure is that earnings are expected to fall to $1.43 this year versus $1.73 last year, and even though the company is more optimistic about 2012 earnings, its spotty record of losses is not encouraging.

Following a breakdown in April at $16, the stock attempted to make a bottom in May, but failed, falling rapidly to its low at $13.51 in June. The support at between its low and $16 could hold, but it is unlikely that the stock will make much headway beyond the 50-day moving average (blue line) at $15.50.

Sell this stock now and hold cash with the expectation that better buys in the same group of stocks will appear before the end of the summer.