The S&P/TSX Composite had another good trading week to Thursday’s close, climbing 1.3 per cent.
The benchmark is now hugely frothy and overbought according to Relative Strength Index (RSI). The current RSI reading is 78.6, well above the sell signal of 70. The index’s year-to-date total return is into positive territory at 0.66 per cent.
There are eight index members trading at technically attractive, oversold levels with RSIs below the buy signal of 30.
Altus Group Ltd is the most oversold stock in the benchmark, followed by Dorel Industries, Canadian Utilities Ltd., Hydro One Ltd., CI Financial Corp., Cominar REIT, Sienna Senior Living Inc and ATCO Ltd.
I picked the index itself as the focus chart this week. The S&P/TSX Composite is more overbought than at any point since November of 2017.
RSI sell signals have a mixed record as warning signs for the domestic equity market in the past 24 months. A sell signal in early June 2016 worked unfortunately well as it was followed by a 4.7 per cent decline in the benchmark to June 27, 2016. Index performance all-but ignored a December RSI sell signal by merely pausing before continuing its march higher.
A February 2017 sell signal was more relevant as the index dropped 3.6 per cent by March 22, 2017. The benchmark was consistently overbought for the September to November 2017 time frame, but no corrections occurred. Following that, however, a January 2018 sell signal was followed shortly thereafter by a very painful 8.0-per-cent market slide before Feb. 9.
The history of effectiveness for sell signals is a bit indifferent so it’s possible the index will ignore the current one. Still, the depth of previous sell-offs that do occur after sell signals suggests that investors should probably be patient and wait for less frothy conditions before adding to equity holdings.
There are almost 30 overbought S&P/TSX Composite stocks trading in overbought territory, a big number we’d expect given that the benchmark is also above the 70 sell signal. MEG Energy is the most overbought company in the index, followed by Suncor Energy Inc., Valeant Pharmaceuticals, Canadian National Railway Co., Nuvista Energy ltd., Great Canadian Gaming Corp., Magna International Inc., TD Bank, Precision Drilling Corp., and Parex Resources Inc.
Scott Barlow