The market is entering deep overbought territory, and these stocks could be due for a pullback
Certain stocks, including Cintas and Chipotle Mexican Grill , may be due for a pullback as the market hovers close to overbought conditions, according to one popular metric. Investors have maintained their optimism in the last few weeks after tame U.S. inflation data for October hinted that future interest rate hikes may be off the table. The three major indexes are on pace for weekly gains , which would mark their third straight positive week. The S & P 500 and the tech-heavy Nasdaq Composite gained more than 2% by Thursday’s close, while the Dow Jones Industrial Average is on pace to add 1.9%. The broader market is on the cusp of entering overbought territory, however, according to Wolfe Research. That means the recent market rally could have gotten too extended in the immediate term, and that more time is needed to digest those gains. CNBC Pro used FactSet data to screen for the most overbought and oversold names in the S & P 500 based on their 14-day relative strength index, or RSI. A stock with a 14-day RSI greater than 70 is considered to be overbought and at risk of a pullback. The higher the RSI, the more likely it is that investors are too optimistic about a stock in the near term. On the other hand, a reading lower than 30 typically means a stock is oversold and ready for a short-term bounce, with a low RSI usually indicating souring sentiment around a stock. Here are some of the most overbought stocks in the S & P 500: Uniform supplier Cintas is the most overbought name on the list, with a 14-day RSI of 98.5. The stock gained 3% this week and is up nearly 22% for the year. As of Thursday’s close, the stock had a forecasted downside of about 3%, based on its average analyst price target. About 43% analysts covering the company rate it a buy. Taking the long-term view, Truist Securities on Monday initiated Cintas with a buy rating and $625 price target, saying a return to normalized pricing increases and moderating input costs, with materials such as labor and materials, could drive upside margin gains. “Valuation is relatively rich, but we believe a premium multiple is justified by business quality, growth prospects and management’s track record of value creation,” Truist analyst Jasper Bibb wrote. American Express , another company that has seen a boost in its stock price this week, could also be due for a pullback. And analysts covering the company expect shares could gain more than 8% over the next 12 months. Shares of the financial services giant are up 4.6% this week, with its gains over the last month fueled by its third-quarter earnings and revenue beat reported on Oct. 20, when management also reiterated its confidence in the company’s strong full-year guidance. The company was initiated by Barclays at an overweight rating on Wednesday, and also by TD Cowen at market perform on Oct. 31. Chipmaker Qualcomm — which has a 14-day RSI of 94.98 — is also overbought. Analysts covering the company forecast a 7.8% upside for its stock price, and just above 50% rate it a buy. Shares have soared more than 16% over the past month on the back of Qualcomm’s better-than-expected sales and earnings numbers for the fiscal fourth quarter. The company, which makes vital processors for most high-end Android devices as well as lower-end phones, also signaled early signs of stabilization in demand for its handsets. Other overbought names include fast-food chain Chipotle Mexican Grill and industrial companies TransDigm Group and Ingersoll Rand . These are some of the most oversold names in the broader market: Oil and gas companies APA Corp and Marathon Oil made the oversold list, with the stocks scoring an RSI of about 23.3 and 28.9, respectively. APA Corp has a forecasted upside of 38.1%, the highest of the list, while Marathon Oil could gain nearly 37%, according to analysts’ average price targets. APA has lost 13% over the past month, while Marathon has sunk about 11%. Marathon’s third-quarter earnings and revenue, released on Nov. 1, exceeded analysts’ expectations, according to FactSet. The company had also announced a 10% quarterly base dividend increase to 11 cents per share. Shares gained 3% on Friday. Oil prices have fallen recently as U.S. crude inventories have continued to rise while production remained steady last week. Another oversold name is Paycom Software , which has an RSI of 25.7 and is loved buy just under a third of analysts covering the stock. Shares are up 2.2% this week. UBS recently initiated the payroll technology provider at a buy rating and $235 price target, saying the company’s year-to-date underperformance provides an attractive long-term investing opportunity. The firm sees Paycom’s performance improving due to pricing and prospects of international expansion. Stocks about to enter oversold territory include supermarket operator Kroger , Coterra Energy and cybersecurity company Cisco Systems .
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