What are we looking for?
Mid-cap companies in the United States and in Canada that are trading in a long-term uptrend but are considered oversold because of a recent short-term decline in price.
The screen
The S&P 500, Nasdaq and TSX have been trading in a sideways pattern since March because of increasing volatility and looming uncertainty in financial markets.
Tactically speaking, technical analysis can be used to take advantage of the choppy trading of ranging markets by using tools that detect extreme price movements to identify stocks that have recently experienced a recent short-term decline in price. The screen identifies companies with a market capitalization between $2-billion and $10-billion, are in the 80th percentile of the Thomson Reuters Price Momentum Model, and have a 14-day relative strength index (RSI) below 30.
This proprietary price momentum model weights industry, short-, mid-, and long-term price trends of individual companies and ranks them among their regional peers. The RSI is a momentum indicator used to identify overbought and oversold conditions by comparing the magnitude of gains to losses for a given period. A level below 30 classifies an asset as oversold whereas a level above 70 will be considered overbought.
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What did we find?
The results identified 12 companies that are trading in a long-term uptrend that recently experienced a decline in price and are considered oversold based on a 14-day RSI reading. MacDonald Dettwiler and Associates Ltd. is considered one of the most oversold stocks on this list with an RSI of 17.75.
Despite the recent decline of roughly 7 per cent in the past 10 trading days, the strong Price Momentum Model score of 92 recognizes that the stock continues to trend higher from a long and medium term perspective.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio.
Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.