After the stock market hit record levels this week, it may be time for investors to consider trimming their positions in overbought names. The S & P 500, Dow Jones Industrial Average, and Nasdaq Composite all reached all-time highs. However, fresh economic data that dashed Federal Reserve rate cut hopes caused the major averages to pull back from those levels. Despite this, Nvidia saw significant gains following a blockbuster earnings report.
Stocks can become overbought based on their 14-day relative strength index (RSI). A stock with a 14-day RSI greater than 70 is considered to be overbought and at risk of a pullback. A high RSI indicates that investors are too optimistic about a stock in the near term. On the other hand, an RSI lower than 30 signifies that a stock is oversold and could be due for a short-term bounce.
Moderna emerged as the most overbought stock in the S & P 500 with an RSI of approximately 86.5. Despite analysts maintaining a consensus buy rating on the vaccine maker’s shares, they believe the stock could drop by more than 18%. Moderna’s shares have surged by nearly 68% this year, reaching a new 52-week high after a more than 25% gain this week.
First Solar, once a beaten-down stock and now seen as a potential AI play, also made the overbought list with an RSI of about 81.8. Analysts predict that the stock could decline by almost 11.4% from its latest close, despite maintaining a consensus buy rating. Following a more than 38% surge this week, UBS analysts highlighted First Solar’s unique positioning to benefit from rising electricity demand driven by artificial intelligence.
Johnson Controls, another company touted for its AI potential through its HVAC offerings, also found itself in the overbought category with an RSI of over 78. Analysts anticipate a potential 8% pullback in shares that have already seen a 28% rally this year. Elliott Investment Management recently acquired a stake of over $1 billion in Johnson Controls, becoming one of the conglomerate’s top 10 investors.
Ulta landed in the oversold list with an RSI of around 25. Despite analysts holding a consensus buy rating on the stock and projecting a potential increase of more than 39% over the next year, Ulta’s shares have declined by about 22.5% this year. Analysts from various firms have lowered their price targets on Ulta due to increased competition with brick-and-mortar retailers and a softer U.S. beauty market.
Other oversold stocks mentioned include SLB, J.B. Hunt, and Molson Coors. These stocks have experienced downward trends based on their RSIs, indicating potential opportunities for a short-term bounce after being oversold.
Investors should carefully analyze the current market conditions and consider reevaluating their positions in overbought and oversold stocks as the stock market continues to experience fluctuations amid record highs.