Our market is defying the big sell-off on Wall Street but don’t get too comfortable as Credit Suisse is warning that the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is facing an impending drop.
The top 200 index is up 0.3% on Thursday as strength in big bank stocks and large cap resource stocks helped push our market into the black.
But Credit Suisse’s quantitative analysts believe our market is facing a significant pullback within a week but embattled Telstra Corporation Ltd (ASX: TLS) could enjoy a bounce.
Quantitative analysts use price movements and trading volumes to predict the near-term direction of stocks, and in this case it’s the Relative Strength Index (RSI).
“Since June 2016 the market has breached the RSI 70 level five times. The average consecutive duration above the overbought level is less than one week and each time has been followed by a rapid RSI drop back to neutral or toward oversold levels,” said the broker.
“In the majority of cases the index price has also retraced shortly after the market breached the overbought levels, which last occurred on the 20th and 21st June.”
RSI measures the magnitude of recent gains and losses over a specific period (in this case 14 days), and Credit Suisse believes that consumer staple stocks like Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES) could lead the falls given that they look overbought.
The insurance sector also looks vulnerable on this measure with Suncorp Group Ltd (ASX: SUN) looking particularly overbought.
This is the key reason why Deutsche Bank downgraded the stock to “hold” from “buy” as the stock’s recent outperformance has put its share price ahead of Deutsche’s fundamental valuation of the stock (click here to find out more).
But there are some stocks that are also looking oversold. Credit Suisse notes that the share price of our largest telco, Telstra, could recover from its sharp sell-off that has stripped 8% off its market cap in just a month when the top 200 benchmark has gained more than 3%.
Other stocks that could also enjoy a relief rally are hospital operators Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) and Healthscope Ltd (ASX: HSO), although I don’t believe the stocks can sustain any rally given the ongoing industry headwinds.
Any drop in the broader market though should be regarded as an opportunity for investors to buy quality stocks with an upbeat outlook.
From that perspective, you might want to read the latest report from the experts at the Motley Fool as they have identified some blue chips that are well placed to outperform.
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Motley Fool contributor Brendon Lau owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.