3 Mega Caps With RSIs That Scream Oversold

Key Points

• All three stocks have RSIs at 30 or below, suggesting extremely oversold conditions. 
• Looking at the upside, Netflix’s earnings were strong last night, and shares are up pre-market.  
• Morgan Stanley’s shares are trading along long-term support. 
• Southwest has the lowest RSI of the three and is back at 2014 levels despite turning over record revenues.

No one wants to catch a falling knife, but everyone loves a bargain, and tracking stocks that have been falling hard can be a great way to spot one. One of the most common indicators out there that’s used for just that purpose is a stock’s Relative Strength Index (RSI). 

It considers a stock’s recent performance, typically the past 14 trading days, and spits out a number that ranges between 0-100. A reading of over 70 indicates overbought conditions, and a reading below 30 indicates oversold conditions. The more extreme the reading on that range, the more extreme the suggested condition. 

Despite a strong first half to the year, equities have been struggling since July, with the S&P 500 falling as much as 9% in that timeframe. A drop like that in a benchmark index usually means much more exaggerated drops in individual stocks, which is the case right now as we head into the final few weeks of the year. With that in mind, here are three mega-cap stocks with RSIs at 30 or below that are worth tracking for a bounce.  

Netflix Inc NASDAQ: NFLX

The streaming giant has been working hard to undo the damage from the 75% drop last year, and its shares were performing well all the way through July. While they had a ways to go before they had completely reversed the selloff, they were still up the guts of 200%. 

It’s been one-way traffic for much of the past three months, though, with a drop of 30% in the stock forcing the RSI to its lowest point in more than a year this week. Chief among the drivers was weak guidance from the company in their July earnings report, but the subsequent reaction in shares is starting to look extremely overdone. 

Last night’s Q3 report smashed analyst expectations and showed solid growth in Netflix’s subscriber numbers, a key metric that’s always closely watched. Shares are due to open up for Thursday’s session, and we don’t expect the RSI to linger below 30 for much longer. 

Morgan Stanley NYSE: MS 

A 7% drop yesterday meant that shares of the financial giant closed at their lowest level since the summer of 2022. Having already been trending down since July, yesterday’s dip was driven by what investors say was a soft Q3 earnings report despite Morgan Stanley beating expectations for the headline numbers. 

Concerns were also shared around the company’s increasing provisions for credit losses, reflecting the knock-on effect of the higher interest rate cycle we’ve been in that’s causing borrowers some pain. This was also a factor in the muted M&A activity reported, with fewer deals happening due to increased borrowing costs. 

The stock’s RSI is now at 30, and while the fundamentals mightn’t suggest a strong buy right now, the technical setup is interesting. In addition to the RSI suggesting they’re oversold, shares are also back trading along with long-term support in the $75 region. This is where the sellers ran out of steam in June and October last year, and if Morgan Stanley shares are going to bounce back from anywhere, it will be around here. 

Southwest Airlines Co NYSE: LUV

Last up is budget carrier Southwest, which has been caught up in the general malaise dragging the entire airline industry down since 2021. The latest selloff started in, you guessed it, July, when any hope of a late summer recovery rally vanished. The 37% slide since then, including yesterday’s 4% drop, means the stock is coming worryingly close to the lows it hit during the darkest days of the pandemic. 

It also means shares are back trading at 2014 levels, which is a red flag in and of itself, but the RSI is in the low 20s. Going off the RSI alone, Southwest is by far the most oversold of the three stocks listed here and presents an interesting opportunity to those with an appetite for risk.  

Sure, they are, like most of their peers, hurting from higher costs, squeezed margins, and falling airfares, but Southwest’s revenues have never been higher. If you believe in the brand for the long run, then their shares have got to feel cheap down here. At these prices, buyers stepped in en masse back in April 2020, when people thought airlines were done and dusted, so don’t be surprised if they’re to be found here again soon in the coming sessions.