Stock Market Rally Raises Concerns for Overbought and Oversold Stocks
The stock market is experiencing its best week of 2023, with notable gains across major indices such as the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite. However, amidst the rally, some stocks may have become overbought and could be due for a pullback. CNBC Pro analyzed the 14-day relative strength index (RSI) of stocks in the S&P 500 to identify the most overbought and oversold names. Stocks with an RSI above 70 are considered overbought, indicating a potential pullback, while an RSI below 30 suggests oversold conditions and the possibility of a short-term bounce.
Overbought Names: McDonald's and Coca-Cola
Fast food giant McDonald's made the list of overbought stocks with an RSI of 80.16. Despite this, analysts estimate the stock has a 14.7% upside potential, with a majority of analysts rating it as a buy. McDonald's recent quarterly earnings and revenue beat, along with its ability to gain market share among middle- and high-income consumers, has contributed to its stock's positive performance. Similarly, Coca-Cola, another consumer name, has an RSI of 79.66. Analysts rate the stock as a buy and anticipate a 12.4% additional upside potential. Although Coca-Cola's shares have seen a modest increase for the week, they remain down by more than 10% for the year.
Other overbought companies include Monster Beverage, Keurig Dr Pepper, Chipotle Mexican Grill, and Darden Restaurants, all of which have experienced notable stock gains.
Oversold Names: Catalent, Moderna, and SolarEdge Technologies
Among the most oversold stocks in the broad market index are several health care companies. Catalent, a biotech company, has seen a significant decline in its shares despite a Friday rally. With an RSI of just 10.52, the stock has the potential for a 47.1% gain according to the consensus price target. Moderna, a vaccine maker, remains oversold despite a strong week of gains. The company's RSI stands at 14.28, and shares fell following its earnings announcement, primarily due to falling demand for its COVID shots. Solar energy companies Enphase Energy and SolarEdge Technologies also made the oversold list, with RSI scores of 15.8 and 18.47, respectively. The struggling solar sector, impacted by a high-rate environment and weak guidance, has faced challenges in 2023.
Other oversold names from this week include Revvity, Henry Schein, Align Technologies, and Fortive.
In conclusion, while the stock market rally has brought gains to many stocks, some have become overbought and may be due for a pullback, while others have become oversold and could potentially experience a bounce. Investors should carefully evaluate the RSI and consider the unique factors influencing each stock before making investment decisions.
Stock Market Rally: Implications for New Business Formation
The current stock market rally, while beneficial for many, raises concerns for new business formations, particularly those considering public trading. The market's best week of 2023 has seen some stocks become overbought, suggesting a potential pullback, while others have become oversold, indicating a possible short-term bounce.
Overbought Stocks: A Cautionary Tale?
The overbought list includes giants like McDonald's and Coca-Cola, with RSIs of 80.16 and 79.66 respectively. Despite their overbought status, analysts estimate potential upside for both stocks. However, this scenario presents a cautionary tale for new businesses. While entering a rallying market might seem attractive, the risk of becoming overbought and experiencing a subsequent pullback could impact a new business's market performance and investor confidence.
Oversold Stocks: An Opportunity in Disguise?
On the flip side, several health care companies, including Catalent and Moderna, and solar energy companies like Enphase Energy and SolarEdge Technologies, are among the most oversold stocks. These stocks, despite facing challenges, present potential for significant gains. For new businesses, especially those in similar sectors, this could represent an opportunity. Understanding the market dynamics that lead to a stock being oversold could provide valuable insights to avoid similar pitfalls or strategically position for a bounce back.
Market Rally: A Double-Edged Sword for New Businesses
In essence, the stock market rally, while promising on the surface, could be a double-edged sword for new businesses. It underscores the importance of careful market evaluation and strategic decision-making, crucial for businesses planning to enter public trading. It's a reminder that market trends, such as overbought and oversold conditions, should be key considerations in their strategic planning.