The S&P/TSX Composite rose another 1.0 per cent for the trading week ending with Thursday’s close and the benchmark is now up 14.1 per cent for 2019. In terms of technicals, the index is trading at the high end of the neutral range by Relative Strength Index (RSI) at 67.4, much closer to the overbought sell signal of 70 than the oversold buy signal of 30.
There is only one index member stock, North West Co Inc., trading at technically attractive oversold levels this week.
The lack of options for oversold stocks led me to Power Corp. of Canada, the frothiest, most overbought benchmark constituent for the focus chart this week.
Like most domestic credit and interest rate sensitive stocks, Power Corp. took a beating in the latter half of 2018 and has recovered strongly year to date. By and large, however, the stock price has remained in a range between $25 and $35 for the majority of the past 36 months.
RSI sell signals like the current one have a mixed track record in predicting price corrections for Power Corp. stock. It was very briefly overbought in November, 2016, but the down move afterwards was marginal. Another sell signal in February of 2017 was more predictive as the price fell 11 per cent by the end of May, 2017.
A series of sell signals in October and November of 2017 also provided useful warnings for shareholders. Between Nov. 7, 2016, and March, 26, 2018, Power Corp. dropped 16.1 per cent.
The stock has been oversold for most of this month. The price ended Thursday at $31.42 and the next technical test, the three-year high of $33.68, will be an important one if it happens. Based solely on the chart, there is a risk of a temporary pullback but I don’t think current shareholders have to worry about a big drop in the short term given the strength of current positive trends.
As always, fundamental research (in this case to gauge whether valuations overstate future growth prospects) could tell a different story and fundamental research should always be completed before any market transactions.
There are 27 S&P/TSX Composite constituents joining Power Corp. on the overbought list this week. Transalta Renewables Inc. is the second most overbought company, followed by Thomson Reuters Corp., Transalta Corp., Boyd Group Income Fund, Dream industrial REIT and MAG Silver Corp.
Scott Barlow, Globe Investor’s in-house market strategist, writes exclusively for our subscribers at Inside the Market.