Dividend stocks dominate list of oversold TSX constituents

The S&P/TSX Composite had a solid week, but dividend stocks got smashed, leaving a number of widely-held stocks trading at oversold levels.

The domestic benchmark climbed 1.3 per cent for the trading week ending with Thursday's close and, according to Relative Strength Index (RSI), the market as a whole is trading in the technically neutral zone. The current RSI reading of 52.7 is roughly mid-way between the buy target of 30 and the sell signal of 70.

There are 34 oversold stocks this week – a big number and a surprise when the index rises more than 1 per cent. Income-related companies dominate the list. In the real estate sector, there's First Capital Realty Inc., Smart REIT, Allied Properties REIT, Cominar REIT, Boardwalk REIT, and H&R REIT. BCE and Rogers Communications represent telecoms. For utilities, we have Hydro One, Algonquin Power and Utilities, TransAlta Renewables and Emera. You get the picture.

I picked Rogers Communications Inc. for the focus stock primarily because it's more oversold than at any time in the past two years. There is, however, a problem – the recent sell-off has pushed the stock well below the 200-day moving average trendline. This could signal a sustained downturn.

The chart strongly suggests that the RSI buy signal can, and probably should, be ignored.

For one, we've seen in the past that RSI is less effective when a stock price is below the 200-day moving average. For Rogers specifically, buy signals in March of 2015, April of 2015, and December of 2015 were not followed by any sustained rallies.

The 200-day moving average itself has been the best indicator for Rogers stock. The price bounced higher off the trendline in December of 2014, July of 2015, September of 2015, February of 2016, April of 2016 and June of 2016. In the period between March and September 2015, the stock was below the trendline and dropped frequently after attempting to rise above it.

In technical terms, this does not look like a good entry point for Rogers Communications. Investors should wait until the price rises above the 200-day. But as always, investors should complete fundamental analysis as part of their research. In this case, there could be an excellent valuation-oriented reason that makes the stock more attractive.

The list of overbought, technically vulnerable stocks by RSI is also large this week. Financials make up a big portion – thanks to a steepening yield curve – as Sun Life Financial, Manulife Financial, Power Financial and TD Bank are among the most overbought S&P/TSX Composite constituents.

Mining stocks are also prominent in the overbought list (although importantly, the sector is selling off as I type on Friday). First Quantum Minerals, Russell Metals Inc., Labrador Iron Ore Royalty Corp., and Lundin Mining are among the stocks trading above the RSI sell signal of 70.

Follow Scott Barlow on Twitter @SBarlow_ROB.