As we move into the latter half of December 2023, the S&P 500 index showcases a mixed bag of performance, prompting investors to question the sustainability of recent bullish trends. After a strong run-up in the past months, highlighted by Donald Trump’s reelection, several stocks now appear to be on the brink of a pullback, given their increasingly overbought conditions. This situation urges a closer examination of stock valuations and market sentiment, particularly within the technology sector.
The S&P 500 index saw a week-on-week decline of 0.6%, raising eyebrows in a market otherwise buoyed by political catalysts. Specifically, the Dow Jones Industrial Average stumbled more significantly, recording a drop of 1.8%. Interestingly, the Nasdaq Composite bucked this trend with a modest gain of 0.3%. Such divergent performances across indices highlight underlying sector volatility amidst a broader market correction, necessitating a more granular approach to stock selection.
Investors and analysts are particularly intrigued by stocks showing extreme readings on the 14-day Relative Strength Index (RSI), a momentum oscillator that evaluates asset price changes over time. When stocks fall above an RSI of 70, they are deemed overbought, indicating possible selling pressure ahead. Conversely, those plummeting below an RSI of 30 are designated as oversold—potentially signifying a rebound.
Among the overbought stocks, technology giants have taken center stage. Apple, a key player within the so-called “Magnificent Seven,” registered an RSI of 74, reflecting its impressive appreciation of nearly 29% year-to-date. Analysts from Bernstein and Morgan Stanley have both reiterated their favorable outlook, placing Apple as a key selection for 2025, buoyed by anticipated robust growth in iPhone replacements and services.
Tesla, another tech heavyweight from the Magnificent Seven lineup, has garnered even more attention, boasting an RSI of 77. The electric vehicle manufacturer has capitalized on its association with Trump, seeing its shares ascend by 73% since the election. Roth MKM analyst Craig Irwin noted that Musk’s rapport with the president-elect has arguably broadened Tesla’s appeal and credibility, thus invigorating its stock performance.
ServiceNow has also entered the overbought territory with an RSI of 73. Despite a tremendous year, analysts are beginning to raise caution flags. KeyBanc’s Jackson Ader downgraded the stock, suggesting that while ServiceNow has established itself as a leader in AI and possesses significant growth potential, it may lack further upside in the short term. Ader highlighted that this software firm, which has seen a 58.7% surge in 2024, could face valuation scrutiny amid its impressive growth metrics.
In contrast, stocks such as Omnicom Group have landed on the oversold radar, registering an RSI of merely 24. The marketing and communications firm has had a disappointing year, with a mere 4.4% increase. The company’s recent announcement regarding its acquisition of Interpublic has raised eyebrows and could be a pivotal moment in its recovery, pending favorable execution.
Additionally, pharmaceutical giant Johnson & Johnson and energy supplier Consolidated Edison have also surfaced in the oversold ranks, suggesting that various sectors are experiencing uneven pressures. As these companies continue to grapple with their respective market forces, their current valuations should be closely monitored.
As 2023 concludes, the market presents a multifaceted landscape characterized by both overbought and oversold indicators. Investors must exercise prudence while leveraging tools like the RSI to navigate potential pitfalls in their portfolios. Understanding the narratives behind these movements—whether driven by stock-specific news or broader economic factors—will be essential for making informed investment decisions during this critical end-of-year period.
The dichotomy between hot-performing tech stocks and lagging entities reinforces the need to adopt a nuanced view of the market, especially as we head into 2024.