The S&P/TSX Composite dropped a painful 1.6 per cent for the trading week ending with Thursday’s close and now sits 5.3 per cent lower for the year.
Technically, the benchmark is in neutral territory by Relative Strength index (RSI) with a reading of 41 that is between the buy signal of 30 and the RSI overbought sell signal of 70.
There are 25 oversold, technically attractive index stocks trading below the RSI buy signal this week. Energy companies dominate the list, but major banks – Canadian Western Bank, Canadian Imperial Bank of Commerce and Bank of Montreal - are also on the list.
NuVista Energy Ltd. is the most oversold company in the benchmark, followed by Richelieu Hardware Ltd., Boardwalk REIT, Lucara Diamond Corp., and Whitecap Resources Inc.
I picked Bank of Montreal for the focus chart this week for its prominence in the Canadian market. The good news is that RSI buy signals have generally worked well in uncovering profitable entry points for the stock over the past three years. The bad news is that buy signals have not worked at all more recently.
A buy signal in January of 2016 successfully forecast a 46-per-cent rally (not including dividends) to March of 2017. A May 2017 buy signal predicted a weaker rally before further price weakness, but another RSI buy signal in September 2017 was followed by an 18-per-cent appreciation by late January 2018.
More recently, BMO’s price stopped falling after a buy signal in October 2018 but failed to rally. The stock went sideways before getting caught up in the December sell-off that also hit U.S. bank stocks.
I don’t fully trust the current buy signal, but I’m taking it seriously at the same time. The longer-term history, combined with a positive fundamental outlook (as always, fundamental research needs to be part of every market transaction), might make BMO an interesting candidate for further study here.
There are 11 overbought, technically vulnerable S&P/TSX Composite constituents by RSI this week, led by Hydro One Ltd. The list is primarily made up of defensive market sectors, as highlighted by Loblaw Companies Ltd., Emera Inc., Metro Inc., BCE Inc. and Telus Corp.