The S&P/TSX Composite fell 0.6 per cent for the five trading days ending Thursday although there were many days where market conditions felt a lot worse. The index, as a whole, remains in a boring neutral range in terms of my favoured technical analysis measure, Relative Strength Index (RSI), although there is a lot of interesting change going on under the surface.
The markets' abuse of income-oriented stocks is the most important investment trend by a wide margin. The recent surge in global and Canadian bond yields caused widespread selling in dividend paying stocks. Real estate investment trust and utility stocks now dominate the list of oversold, technically attractive TSX constituents.
This week's focus chart is RioCan REIT, but it comes with a caveat: if bond yields keep rising, weakness in the REIT sector is likely to continue no matter how technically interesting they become.
RSI has been highly effective in identifying successful entry and sell prices for RioCan in the past two years. Buy signals – and RSI reading below 30 – signalled significant rallies in September, 2014 and December of 2014 as well as in March of this year.
The sell signal of 70 has also worked well. Warning signs in January of 2014, July 2014 and January 2015 were followed by downdrafts in the company's market value.
Unlike the oversold list of TSX stocks, the mix of six overbought companies offers no coherent theme whatsoever. Ritchie Brothers Auctioneers Inc. is now the most technically extended, likely-to-experience-a-correction member of the benchmark followed by ATS Automation Tooling Systems Inc.
Current market conditions make fundamental research to complement technical analysis more important than at any time in recent memory. The past five years has seen investors become accustomed to central bank-driven low interest rates. The possibility that this trend is now over brings with it the risk that the income-generating market leaders of the last few years will become the laggards of the next few.
Follow Scott Barlow on Twitter @SBarlow_ROB.
