Major bank stocks have gone from overbought to oversold in a heartbeat. With earnings report-related volatility now likely behind us, the Relative Strength Index strongly suggests bank stocks are due for a bounce.
The S&P/TSX Composite fell about 1.5 per cent over the past five sessions, resulting in a much wider selection of oversold stocks for traders to choose from. Bank of Montreal and Royal Bank of Canada are among the highlights after both fell below the RSI buy signal of 30.
Real estate investment trusts are surprising new tenants in the oversold category. Dundee REIT is there, joined by Calloway REIT and Cominar REIT are also oversold.
There are also several mining heavyweights on the list this week – Teck Resources, Sherritt International and Labrador Iron Ore Royalty Co.
Market history tells us that, of the three major oversold sectors, the bank stocks are most likely to bounce. I'm still worried that mining stocks could be value traps – they might just sit there undervalued while commodity prices languish. REITs, similarly, will be held down if interest rates continue to move higher.
When the biggest company in the country by market cap is oversold, then it's got to be the focus chart for the week. The chart shows that RSI provided very effective buy signals in both July 2012 and May 2013.
I pointed to the banks as becoming attractive last week, probably a week early. But the point remains that RSI has worked well for bank stocks recently. After a sustained period above the sell signal, they have now corrected.
I warn every week that while RSI is very useful, the numbers can change really fast. The financials have underscored that lesson over the past two weeks. As always, RSI and technical indicators should not be used as the only reason to buy or sell a stock.