Is It Time to Lock in Profits on These 3 Overbought Stocks?

Key Points

• The market has climbed nearly 11% YTD, with the SPY ETF just 1% off its all-time high, as summer trading begins and volumes dwindle.
• NVIDIA Corp. (NASDAQ: NVDA) has surged 130% YTD and 20% over the previous week following a blowout earnings release, leading the market's bullish momentum.
• Several stocks have entered the overbought territory, with First Solar (RSI 88.85), Woodward (RSI 78.5), and Qualcomm (RSI 75.79) signaling potential pullbacks.

As summer trading begins and volumes dwindle, the overall market has climbed nearly 11% year to date (YTD), with the SPY ETF  just 1% off its all-time high. Leading the charge is NVIDIA Corp. NASDAQ: NVDA, the market's hero, now up 130% YTD and 20% over the previous week following a blowout earnings release. Amidst this bullish backdrop, several stocks have quickly, and in some cases, dramatically, entered overbought territory, potentially signaling a pullback.

The Relative Strength Index (RSI), a popular momentum indicator, helps identify overbought and oversold conditions. When a stock's RSI exceeds 70, it is considered overbought and may be due for a correction. Here are three stocks showing overbought signals, suggesting it might be time to consider locking in profits.

First Solar, Inc. Rides High on AI Optimism and Regulatory Support

First Solar, Inc. NASDAQ: FSLR has been riding high on solid performance in the renewable energy sector.  The stock price has risen sharply recently due to positive analyst coverage and growing enthusiasm about its potential to benefit from the artificial intelligence revolution. Additionally, the stock gained momentum after news that China's critical regulatory agency for solar energy supports easing downward pricing pressures caused by intense competition.

Due to the incredible 56% surge higher in the month, its RSI reached a highly overbought level of 88.85. Despite its robust fundamentals and positive market sentiment, the stock’s RSI suggests it may be due for a pullback. Given the high likelihood of a near-term correction, investors might consider taking some profits off the table.

Woodward, Inc. Climbs on Robust Earnings Report, But RSI Indicates Overbought Status

According to the RSI indicator, Woodward, Inc. NASDAQ: WWD is another stock with overbought conditions, currently at 78.5. The company reported strong earnings on April 29th, 2024, with an earnings per share (EPS) of $1.62, beating analysts' consensus estimates of $1.28 by $0.34. Revenue for the quarter was $835.34 million, exceeding expectations of $807.04 million and marking a 16.3% increase year-over-year. 

Following its earnings release, the stock gapped to new all-time highs and has since climbed almost 22% higher on the month, bringing its market capitalization to an impressive $11.2 billion.

Despite the bullish sentiment and a consensus moderate buy rating from analysts, the stock's rapid rise has led to a consensus price target that forecasts a nearly 6% downside, indicating a potential for a pullback.

Qualcomm, Inc. Stock Climbs, Analysts Predict Pullback

Qualcomm NASDAQ: QCOM has shown significant overbought conditions with an RSI of 75.79. The company's rapid surge began after a strong earnings report on May 1st, 2024, with an EPS of $1.93, beating the consensus estimate of $1.82 by $0.11. Revenue for the quarter was $9.39 billion, surpassing analyst estimates of $9.32 billion. After gapping up post earnings, the stock surged over 23% in the past month, driven by its earnings, bullish sentiment, and impressive projected earnings growth. Notably, the stock has extended significantly from significant moving averages, like its 200-day and 50-day simple moving averages.  

Despite this positive outlook, the consensus price target now forecasts a double-digit downside, with twenty-three analysts placing a consensus price target of $180.48 on the stock. The overbought territory, coupled with a negative price target relative to the current stock price, suggests a potential pullback might be on the horizon.

The Bottom Line: Time to Lock in Profits on Overbought Stocks

The broader market’s upward trajectory, highlighted by the impressive gains of the market of global-leading stocks like NVIDIA, underscores the current bullish sentiment and overall uptrend. However, for stocks like First Solar, Woodward, and Qualcomm, the high RSI readings indicate that a pullback may be imminent and perhaps a period of digestion or consolidation before each stock continues higher.

Investors should potentially consider locking in profits on these overbought stocks to safeguard against potential corrections. Maintaining a balanced portfolio and staying informed on market trends, themes, and headlines is essential for navigating these dynamic conditions.