As the stock market soared to record levels this week, investors may be wise to reevaluate their portfolios and consider trimming positions in overbought names. The S & P 500, Dow Jones Industrial Average, and Nasdaq Composite all hit all-time highs, but fresh economic data dampened hopes for Federal Reserve rate cuts, causing the major averages to pull back. Even as some stocks reached new heights, it is essential to recognize when a stock becomes overbought and may be at risk for a pullback.
One indicator to determine if a stock is overbought is the 14-day relative strength index, or RSI. A stock with an RSI greater than 70 is considered overbought, signaling that investors may be overly optimistic and a correction could be on the horizon. On the other hand, an RSI lower than 30 indicates a stock is oversold and could potentially see a short-term bounce. This week, several stocks in the S & P 500 exhibited overbought characteristics.
Moderna, a vaccine maker, topped the list with an RSI of approximately 86.5. Despite analysts’ consensus buy rating on the stock, there are concerns that Moderna may experience a drop of more than 18% in the near future. First Solar, a company with potential in the artificial intelligence sector, also made the overbought list with an RSI of about 81.8. Analysts predict a potential 11.4% decline from its latest close, even though shares soared over 38% this week. Johnson Controls, known for HVAC offerings and recently touted as an AI play, is also considered overbought with an RSI of over 78.
Moderna’s shares surged after reports of bird flu cases in the U.S. and a potential federal government vaccine program. Similarly, First Solar saw an increase in share value following UBS analysts’ endorsement for its role in providing renewable energy sources to major tech companies’ data centers. Johnson Controls gained attention after Elliott Investment Management built a stake of over $1 billion in the company.
While some stocks demonstrated overbought signals, others entered oversold territory. Ulta, with an RSI of about 25, made the oversold list. Analysts, despite a consensus buy rating, believe Ulta could potentially increase by more than 39% over the next year. However, the stock has declined approximately 22.5% this year due to increased competition with brick-and-mortar retailers and challenges in the U.S. beauty market. Other oversold stocks include SLB, J.B. Hunt, and Molson Coors.
As the stock market continues to reach record highs, investors should exercise caution and monitor the overbought and oversold signals in various stocks. By recognizing these indicators, investors can make informed decisions about when to trim positions to mitigate potential risks and maximize returns in a constantly evolving market landscape.