The stock market is oversold, Paradigm Capital says

The miraculous 13 consecutive up day run for the Dow Jones that happened in July is a distant memory, but one analyst thinks the market may be due for a bounce.

In a research report to clients August 20, Paradigm Capital’s Aazan Habib argued that with a five per cent pullback in the S&P, we may now be in an oversold market and offered some advice on how and where to take advantage of this development.

“The S&P 500 appears to be finding support above the 4300 zone as several tactical indicators enter oversold territory, including momentum measures (5-day RSI, stochastics), breadth (NYSE Mclellan Oscillator, % of issues above 20-day moving average), along with the VIX and put/call ratio. This supports a short-term rally in the major indices, possibly back toward the flattening 50-day moving averages (4453 on the S&P 500),” the analyst wrote. “The seasonal composite suggests potential for this corrective phase to continue over the next month, possibly into October, before continuation of the primary uptrend.”

So where does Habib see money to be made? In the energy sector, for one.

“Energy remains at the top of our breadth rankings while Technology and Industrials are correcting within their uptrends,” he added. “Defensive sectors are attempting to bottom on a relative basis and could see near-term outperformance.”

The analyst also offered up three stock ideas that look particularly attractive to him.

“We screened for names that have seen strong earnings surprises in the last quarter and subsequent upward analyst revisions, then filtered for names with attractive technical characteristics,” he said.

Habib said recent tech IPO Coveo Solutions is appealing for its “attractive momentum” and its “relative strength profile. He likes AutoCanada because he sees a two-year downtrend reversing. And he like Birchcliff Energy, whose chart he thinks is due for a technical bounce.