The 10 most overbought and oversold ASX 200 stocks – Week 38

August reporting season is now a thing of the past, but the outcomes continue to persist in the market. Companies that exceeded analyst earnings expectations have soared to extremely overbought levels, while those falling short continue to plummet towards multi-year lows.

The 14-day Relative Strength Index is a momentum indicator that measures the magnitude and speed of recent price changes to assess whether or not a stock is overbought or oversold.

An RSI of 70 or above is considered to be overbought, which means the stock is rising too quickly and likely to experience a pullback. Meanwhile, an RSI of 30 or below is considered to be oversold, which means the stock is falling too quickly and is likely to experience a rebound.

Reliance Worldwide was the most overbought stock on the S&P/ASX 200 last week, with an RSI of 82, while Perpetual sits on the opposite end with an RSI of just 15.

Most Overbought ASX 200 Stocks

Solid Results and Real Estate Stocks

Reliance Worldwide reported a solid FY24, with EBITDA of $274.6 million (flat year-on-year but 3% ahead of consensus), underpinned by positive plumbing sales.

The company anticipates flat sales for the first half of FY25 (excluding Holman business) but higher margins will lead to year-on-year EBITDA growth. While there are ongoing macroeconomic challenges, analysts are seeing encouraging signs including i) positive big box plumbing comparable sales in the US and ii) stabilising UK sales amid improving macroeconomic data. Given these trends, RWC's profit growth is likely to outpace its peers, according to Citi.

"We believe Reliance Worldwide should generate comparatively more operating leverage and has an attractive valuation. As a result, we remain Buy-rated and RWC continues to be out preferred pick in the sector," the analysts said in a note dated 20 August.

The stock rallied 8.9% on the day of its result (20-Aug) and up around 17.5% since then.

Real estate stocks have been on a tear since bond yields peaked last October. One of my favourite data points about this relationship comes from Morgan Stanley: "Charter Hall is by far the most linked to bond yields. Its P/E multiple has a -0.77 correlation vs. Australian 10 year bond yields, and -0.68 vs. US 10 year Treasury yields. Dexus is the second most linked at -0.66/-0.44. This means that as bond yields decline, the multiples of these two stocks generally re-rate upwards."

The below chart shows that the peak in bond yields (red) coincided with a sharp re-rate in Charter Hall shares (blue) in late October. The stock is up around 64% in the past year. This relationship has propelled several REITs from Charter Hall and Centuria into overbought territory.

Charter Hall (blue) vs. US 10-year yield (red) performance, indexed to 100 | Source: TradingView

Most Oversold ASX 200 Stocks

Trending Lower

Perpetual's FY24 result beat market expectations but not where it mattered. The better-than-expected net profit was largely driven by distribution income on seed investments (lower quality earnings) and the sale of its Corporate Trust division. However, Citi says all three divisions (asset management, corporate trust and wealth management) flagged softer-than-expected revenue trends and guidance for 2-4% growth in costs for 1H25, compared to previous forecasts of a modest decline.

The stock fell 3.8% on the day of the result (29 Aug) and down a further 5.6% since then.

This pattern of persistent decline following disappointing results isn't unique to Perpetual. Companies such as Spark, Johns Lyng, Megaport, Cochlear, and Inghams have experienced similar trajectories. After missing market expectations, their stocks have continued to fall, reaching fresh yearly or multi-year lows.