Many investors are arguing that the market is getting frothy. But remember, the market represents more than just a handful of stocks. With that in mind, I began looking at price charts and fundamentals of companies. I found three overbought stocks that look well-positioned for more to come.
Led by the Nasdaq Composite, the month of August become an even greater spectacle. The first week of the new month has produced a handful of record highs, a gain north of 3% entering Friday’s session and a dazzling 22% year-to-date return for the market bellwether.
The price action also begs the question, have risk assets come too far, too fast?
If investors look at the market’s typical and increasingly influential mega-capitalization suspects such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) or Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), there’s cause for alarm. But it may be the world’s largest company, Apple (NASDAQ:AAPL), that is the most troubling sign of an overbought market.
The tech giant has gained nearly 17% in August and roughly 50% in 2020. It makes the Nasdaq’s own performance look quaint by comparison. That’s not the worst of it though. AAPL stock also sports an extremely hard to defend valuation, and a similarly unapproachable price chart. It also puts a once unthinkable trillion-dollar valuation in the rear-view mirror as it trades a whisker away from $2 trillion.
Yet as bad as it sounds, there are other stocks which continue to support the idea of a friendly trend. Let’s look at three of these other market leaders and why, off and on the price chart, each looks like an overbought stock to buy:
Overbought Stocks to Buy: Pan American Silver (PAAS)
The first of my overbought stocks to buy is Pan American Silver. The metals producer is up about 250% since hitting its corrective bottom alongside the broader market. Its year-to-date return of 55% is nothing to sneeze at either.
The bullishness in the miner looks even more determined when considering PAAS’ riskier stochastics and the positioning of shares outside the monthly Bollinger Band. But I’m looking for overbought conditions to beget more of the same.
Technically, shares of PAAS are consolidating around its prior all-time high set back in 2008. It’s a second challenge at moving into higher ground following an outright failure back in late 2011. In my estimation, it sets up an attractive second-attempt base breakout. What’s more, this overbought stock to buy is also a lower-correlation mid-cap which makes it a solid candidate for portfolio diversification.
The next of my overbought stocks to buy is Square. The mobile payments champ has been knocking it out of the park off and on the price chart. Despite early warnings the novel coronavirus would hurt Square given its exposure to small businesses, it hasn’t played out that way.
This week’s standout quarterly results and post-earnings bid to record highs are a testament to its strength.
On the price chart, shares have spiked 14% this week. That puts Square’s year-to-date gains at 130%. But this large-cap stock looks poised to become much bigger.
Technically, this market leader has just broken out of a smaller weekly triangle formed on top of a massive corrective base nearly two years in duration. The bottom line is that it is bullish. And given the size and time spent consolidating, the takeaway on this overbought stock to buy is that Square shares could see $200 by early 2021.
Overbought Stocks to Buy: Overstock (OSTK)
The last of my overbought stocks to buy is Overstock. It may be the most contentious name of the lot. Shares have gained an eye-popping 1,440% in 2020 and a jaw-dropping 4,300% since its March bottom. The company’s founder Patrick Byrne, is also a notorious and controversial figure who single-handedly has taken investors through the proverbial ringer over the years.
But don’t think this year’s standout performance is going to implode on itself. The best may be yet ahead for OSTK investors.
Not only is Mr. Byrne out of his role as CEO, but Overstock’s online retail business is booming. Record sales of $782.5 million were made even more attractive as losses from the year ago period were completely erased and replaced by profits of 84 cents per share.
To be sure, Amazon doesn’t need to move over anytime soon, but Overstock’s report should have competitor Wayfair’s (NYSE:W) attention. What’s more, this overbought stock to buy has also been successfully branching out into the cryptocurrency space with its tZero platform. Need I say more? With a market cap of just over $4 billion, I believe the chart.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. Investment accounts under management do not own any securities mentioned in this article. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.