Energy, airline stocks oversold as investors move to dividend earners

Canadian investors sold energy stocks and dove into dividend earners in the past five sessions, pushing the S&P/TSX Composite Index higher by 1.2 per cent. The benchmark's Relative Strength Index (my preferred measure of short term technical analysis) reading of 54 keeps the market in neutral territory between the buy signal of 30 and the sell signal of 70.

The list of oversold, technically attractive stocks is small but still dominated by small and mid-cap energy names. Energy services company Horizon North Logistics Inc. remains the most oversold stock in the index after falling another 2.7 per cent. Trinidad Drilling Ltd, from the same sector, fell 2.8 per cent for the week and is the fourth most oversold stock.

Outside of the oil patch, Air Canada Class B, Avigilon Corp., car dealership operator AutoCanada Inc., Onex Corp., and Dorel Industries class B are also oversold. Shareholders in surveillance equipment maker Avigilon had a particularly bad week as the stock dropped 22.9 per cent and Autocanada's 17.2 per cent air pocket probably wasn't much fun either.

Air Canada is the focus chart this week. The stock took an almost four per cent beating this week after announcing a business strategy that will crimp profit margins. But, at the same time, oil prices have fallen almost $10 (U.S.) recently and that should reduce operating costs.

RSI has worked reasonably well as a buy signal for Air Canada stock but not so well as a sell signal. The buy signal in May of 2013 did identify a mid-term bottom for the stock and also in February and March of 2014.

The stock does seem to have the ability to remain overbought for long periods – the fourth quarter of 2013 is a good example – so the RSI sell shouldn't be trusted.

At this point, Air Canada stock looks interesting but a) investors need to do their own fundamental homework and b) the airline industry doesn't have a reputation as the single worst long term value creator for nothing.

Keyera Corp., Extendicare Inc. and Brookfield Asset Management class A all gained more than five per cent for the week and are the three most technically extended, overbought stocks in the TSX. Keyera and Extendicare both have indicated dividend yields above 5.5 per cent and are becoming steadily more attractive as government bond yields fall. Potential investors should probably wait until the RSI falls well below 70 to add more.

Follow Scott Barlow on Twitter @SBarlow_ROB.