Yamana and Agnico-Eagle are in the spotlight – and oversold

Canadian investors looking to take advantage of volatility in the precious metals sector have an interesting pair of oversold stocks to look at this week: Yamana Gold Inc. and Agnico Eagle Mines Ltd.

The S&P/TSX Composite climbed by an impressive 1.4 per cent since last Thursday. The index currently has a relative strength index (RSI) reading – our favoured measure of technical strength – of 62 which is moving closer to the overbought signal of 70.

Sun-Life Financial, which I highlighted earlier in the week as oversold, finished the week more than three per cent higher than Monday's close.

Yamana and Agnico Eagle finished the week lower by 6 per cent and 9 per cent, respectively, after the companies agreed to purchase the assets of Osisko Mining Corp. Yamana is now deeply oversold by RSI, and Agnico lies just outside of oversold territory.

Neither stock is cheap. There are no trailing price-to-earnings ratios because both companies have operated at a loss over the past 12 months. The forward P/E of Yamana is 27.5 times and for Agnico, it's a more daunting 50.5 times.

Analysts, however, remain optimistic about both Yamana and Agnico Eagle. Based on the average projected target price, the potential return for Yamana is 35 per cent. For Agnico Eagle, the 12-month price target of $37.20 would provide a return of more than 15 per cent.

An investor would have to be confident not only in the outlook for bullion, but also that the target prices for the stocks were not jacked up by analysts looking to curry favour with management in the midst of a big banking deal. Still, for the short term, it seems like the stocks are washed out.

There are an alarming 38 overbought stocks by RSI this week which suggests things are getting a bit frothy. Almost 70 per cent of the overbought, technically extended stocks are in the energy sector, so investors should use caution there.

The large number of overbought stocks implies that it will take only a few more up days in the market for the entire index to become overbought. As such, I'm not overly excited about adding big positions in the next few days.

As always, technical measures like RSI are not sufficient reason for stock transactions. Fundamentals are important and all investors should fully understand any company they invest in.

Follow Scott Barlow on Twitter at @SBarlow_ROB.