The S&P/TSX Composite slid 1.5 per cent over the past week, which caused a sea change in the technical tone of the domestic equity market.
The number of overbought, technically extended stocks as measured by Relative Strength Index (RSI) fell by about 80 per cent this week and the number of oversold, technically promising companies more than doubled.
Relative strength provided ample warning of an impending correction in the oil patch. The stocks that were most overbought by RSI as of last week, Advantage Oil & Gas Ltd., Whitecap Resources Inc. and Birchcliff Energy Ltd. all experienced steep drops this week.
Birchcliff was the hardest hit, falling 7.4 per cent, while Advantage declined five per cent. Paramount held on surprisingly well – something to keep in mind for the future – easing back 1.5 per cent.
Last week's technical report highlighted Cameco Corp. as oversold but clearly it was a bit early – the uranium miner dropped an additional seven per cent this week. The stock is now deeply, deeply oversold with an RSI of 21 (30 is the buy signal). On the other hand, it's still not attractive on valuation and I'm having a "once bitten, twice shy" issue about featuring it again.
Cott Corp. is now oversold but it's hard to see a catalyst for a rally. The table shows that the forward and trailing price to earnings ratios are the same, which means analysts expect little or no earnings growth in the next twelve months.
Descartes Systems Group is one to keep an eye on in the days ahead even though it's not quite below the RSI sell signal of 30. At 18 times, Descartes stock looks attractive on forward earnings.
More research is needed, but if it turns out that Descartes was unjustly caught up in the broad tech sell-off that started in March, further weakness would represent a very intriguing entry point for patient investors.
The usual caveats apply; technical measures like RSI can be a very helpful starting point but they are not sufficient grounds for investment decisions on their own.
| **OVERSOLD** | RSI | 1W Return % | PE Ratio TTM | PE Ratio Fwd | |
|---|---|---|---|---|---|
| Cameco Corp | CCO | 21.02 | -6.99 | 23.80 | 21.96 |
| Yamana Gold Inc | YRI | 21.40 | -4.76 | N/A | 22.19 |
| Cott Corporation | BCB | 21.42 | -13.19 | 20.55 | 20.85 |
| Avigilon Corp | AVO | 22.92 | -23.29 | 32.30 | 21.56 |
| Dominion Diamond Corp | DDC | 27.47 | -4.70 | N/A | 31.64 |
| Wajax Corp | WJX | 29.95 | -4.60 | 13.07 | 11.64 |
| Novagold Resources Inc | NG | 30.84 | -12.76 | N/A | N/A |
| Major Drilling Group Intl | MDI | 33.23 | -5.09 | N/A | N/A |
| Descartes Systems Grp/The | DSG | 33.32 | -3.73 | 67.65 | 18.65 |
| **OVERBOUGHT** | |||||
| Bell Aliant Inc | BA | 80.74 | 1.85 | 22.48 | 18.19 |
| Russel Metals Inc | RUS | 76.82 | 1.72 | 21.63 | 16.04 |
| Raging River Exploration Inc | RRX | 75.58 | 1.39 | 29.43 | 18.12 |
| Keyera Corp | KEY | 75.36 | 2.03 | 33.22 | 25.87 |
| Inter Pipeline Ltd | IPL | 74.55 | 1.74 | N/A | 25.22 |
Follow Scott Barlow on Twitter at @SBarlow_ROB.