Watch These 4 Overbought Stocks As Market Rotation Continues

Key Points

• Recent market rotations and sector-specific outflows have created a ripe environment for potential pullbacks despite the market's 17% YTD gain.
• Four stocks with elevated RSI levels indicating overbought conditions and potential pullbacks are Ford, Emergent BioSolutions, Fox Corporation, and Iron Mountain.
• Due to their current valuations, a pullback might present a buying opportunity in some of these stocks, while others might offer good profit-taking opportunities.

While the overall market has enjoyed an impressive 17% year-to-date gain, recent rotations and sector-specific outflows have created a ripe environment for potential pullbacks. The semiconductor sector, for example, has seen a notable decline, with the SMH ETF down nearly 10% from its 52-week highs. Significant market rotations can often lead to overbought stocks pulling back as capital shifts from overvalued sectors to undervalued opportunities. 

For example, the IWM ETF, which represents small caps, has surged almost 12% this month, while the technology-focused XLK ETF is in the red.

With this dynamic in mind, let's explore four stocks from various sectors that are currently overbought based on their RSI (Relative Strength Index) and might be due for a pullback. The RSI is a momentum oscillator that measures the speed and change of price movements, with readings above 80 typically indicating severe overbought conditions. Let's look at four stocks in overbought territory and determine if it's time to sell. 

Ford's Technical Analysis: Ripe for a Pullback

Ford NYSE: F has climbed an impressive 23% this month, delighting shareholders. However, the stock's RSI now sits at 82.15, indicating it is in overbought territory. Additionally, Ford is approaching significant resistance on its higher timeframe near $15, a potential indicator of an imminent pullback. Investors might welcome a pullback as the stock's P/E remains in attractive value territory despite its recent surge. Impressively, Ford's forward P/E is only 7.46. 

However, on a fundamental basis, things are uncertain in the short term. The company is set to report its earnings next week. The consensus EPS forecast for the upcoming quarter is $0.62, compared to the reported EPS of $0.72 for the same quarter last year. From a technical analysis perspective, the stock seems ripe for a pullback, which could offer an attractive risk-reward entry given its valuation. However, with earnings around the corner, it might continue to run in anticipation of positive results. 

Earnings Report Fuels Emergent BioSolutions' Rise

Emergent BioSolutions Inc. NYSE: EBS, a life sciences company providing public health threat solutions, has experienced a meteoric rise this year. The stock is up over 400% year-to-date and 761% from its 52-week low, particularly soaring since its earnings report in May. The company reported $0.59 EPS for the quarter, significantly beating the consensus estimate of ($3.65). 

However, after nine consecutive days of gains, the stock's RSI has reached 89, indicating extreme overbought conditions. Analysts predict a significant downside, with a consensus price target of $8 forecasting nearly 34% downside, despite a Hold rating. With the stock stretched significantly from its major moving averages and an RSI nearing 90, now might be the opportune time for investors to take profits.

Potential Pullback for Better Entry Point in Fox

Fox Corporation NASDAQ: FOX, a major player in news, sports, and entertainment, has also shown impressive performance, with its stock up 25.6% year-to-date and over 12% this month alone. However, the stock's RSI of 81.12 suggests it is overbought. Technically, the stock's range expansion in the past two days indicates a potential near-term top as it deviates from its mean and major moving averages. Despite its attractive P/E of 10.88 and forward P/E of 9.18, which may appeal to value investors, a pullback could provide a better entry point for long-term gains, considering its 1.5% dividend yield and projected double-digit earnings growth.

Assessing Iron Mountain's Momentum and Market Position

Iron Mountain Incorporated NYSE: IRM, a global leader in information management services, boasts a dividend yield of 2.6%. However, its P/E ratio of 151 and an RSI of 83.5 suggest it is highly overbought and vulnerable to a pullback. While analysts remain bullish with a Moderate Buy rating based on six analysts, the consensus price target of $82.83 forecasts a nearly 17% downside due to the stock's recent rapid ascent. Year-to-date, Iron Mountain has surged 41.7%, and over the past year, it has climbed more than 61%. A pivotal catalyst to watch that might influence the IRM's momentum is its upcoming earnings release, set for August 1.