The stock market has reached fresh all-time highs this week, but not all individual stocks have followed suit without concern. The S&P 500 surged to a record of 6,600.21, driven by a rise in unemployment claims and an unexpected drop in wholesale prices. These developments have reinforced expectations for a potential quarter percentage point interest rate cut by the Federal Reserve in the coming week. The benchmark index closed the week with a robust 1.6% gain.
However, the significant rise in certain stocks has raised flags, particularly for those that have surpassed a 5% increase and whose relative strength index (RSI) has breached the critical threshold of 70. An RSI above this level typically indicates that an asset may be overbought, increasing the risk of a potential withdrawal in stock prices.
Among the most prominently overbought stocks are Tesla and Micron Technology. Tesla boasts an RSI of 75.6, continuing its impressive rise with an approximate 18% gain for the month of September alone. This momentum follows the announcement of a nearly $1 trillion pay package proposed by Tesla’s board for CEO Elon Musk, which has garnered significant attention and speculation in the market.
Micron Technology has also experienced substantial growth, with its stock climbing about 20% this week — marking its strongest weekly performance since March 2020. Citi has further bolstered confidence in Micron by raising its price target on the stock to $175, indicating an upside potential of 11% from the stock’s close on Friday. Analyst Christopher Danely noted that he expects the company to report earnings on September 23 that are in line with estimates, driven by trends in DRAM and NAND sales as well as favorable market conditions, particularly in the data center sector, which accounts for 55% of Micron’s revenue.
Despite the positive outlooks, the rapid rise in both Tesla and Micron might prompt investors to lock in profits, potentially leading to downward pressure on their stock prices.
Other stocks that have entered the overbought territory include Warner Bros. Discovery, which is facing a takeover bid from Paramount Skydance, and Live Nation. Notably, Western Digital stands out with an RSI of 84.2, marking it as the most overbought stock on the list.
As investors navigate these high valuations, caution may be warranted given the potential for a market pullback amid these overbought conditions.
