Overbought Stocks That Could Be in Danger

by Chris Johnson | August 29, 2012 10:20 am

With less than a week to go in August, the market has defied historical seasonality trends by posting positive returns of more than 2% for the month. So as we head into September — seasonally the worst month of the year to be in stocks — we’ve had an eye out for picks that are in danger of slipping from their bouts of outperforming benchmarks.

To start, there are a few ETFs that could be ripe for selling pressure as we move past Labor Day.

Homebuilder and housing ETFs like the SPDR S&P Homebuilders ETF (NYSE:XHB[1]), for one, look overbought and their rip-roaring rally in August will certainly attract some profit-taking when the market hits some turbulence in September.

Another hot sector that will likely feel the pressure from profit-taking in September is the SPDR S&P Oil & Gas Equipment & Services ETF (NYSE:XES[2]), which has outpaced the S&P 500 for the last few months as oil prices have been on the rise.

On the individual stocks side, there are a good number of well-known names that fall into the same boat. Typically, these stocks are likely to bear more selling pressure if and when a market reversal occurs as investors seek to lock in profitable positions to raise cash.

The ten stocks listed in the table below caught our filter’s eye as overbought candidates. Typically, there are more than a few reasons that a stock  fits this bill, including the performance of their industry groups against the S&P 500 and as the recent transitions in short-term pricing trends of the stocks individually.

Historically, our research shows that these stocks will see exaggerated selling pressure when the markets begin to roll over. Have a look:

Here’s a little more about three of these stocks:

Ingersoll-Rand (NYSE:IR[3]) designs and develops a diverse range of industrial products for the United States and International markets. This industrial manufacturer has hit chart resistance at the $47.50 level at the same time that its shares have registered some technically overbought readings. We expect these two technical factors to lure sellers into the market to lock in profits at this price level and target a retracement back to the $40 level before the stock returns to strength.

Hertz Global Holdings (NYSE:HTZ[4]) shares skipped more than 10%  higher after its move for Dollar Thrifty, taking the stock to an overbought Relative Strength reading with a historical chart resistance at the $15 mark. Expect second-thoughts about the effect of the buyout to combine with chart resistance and result in selling pressure on HTZ shares over the short-term. We believe the shares will see $13 before they hit $16 on the upside.

USG Corp. (NYSE:USG[5]) is one that we almost hate to say will fall, but remembering to not get emotional about stocks is of paramount importance when trading the markets. USG has been a bright spot for the homebuilder sector — the stock doubled the S&P 500 returns for the current quarter. But performance aside, USG shares are butting against overhead resistance at $21 just as its RSI is nearing overbought readings.

Given the current chart, we believe that the time to lock-in profits on USG is here and that the stock is a good example of a technical short opportunity with a target of $16.

As August winds to a close, be sure to keep an eye out for these names.

As of this writing, Chris Johnson did not hold a position in any of the aforementioned securities.

  1. XHB: http://studio-5.financialcontent.com/investplace/quote?Symbol=XHB
  2. XES: http://studio-5.financialcontent.com/investplace/quote?Symbol=XES
  3. IR: http://studio-5.financialcontent.com/investplace/quote?Symbol=IR
  4. HTZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTZ
  5. USG: http://studio-5.financialcontent.com/investplace/quote?Symbol=USG

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