Have you ever watched a stock you love climb so fast that you started wondering if it was too good to be true? That little voice in the back of your head whispering “maybe take some profits” even while everyone else is shouting “to the moon”? Yeah, that’s the feeling a lot of traders are getting right now with several big names in the S&P 500.
The major indexes just wrapped up another winning week, but under the surface something interesting is happening. A handful of high-profile stocks have sprinted ahead so aggressively that a classic momentum gauge – the 14-day Relative Strength Index – is flashing bright red warning lights. When the RSI pushes above 70, the textbook says the name is technically overbought and historically prone to at least a short-term breather.
In my experience, overbought readings don’t always mean an immediate crash – far from it – but they do tend to mark moments where the easy money has already been made. Sometimes the pullback is gentle, sometimes it’s sharp, but ignoring the signal completely has burned more than a few portfolios I’ve seen over the years.
The Overbought List Everyone Is Watching This Week
So which stocks made the cut? I ran a simple screen across the entire S&P 500 looking for names that (a) posted strong gains this week and (b) now sit with a 14-day RSI north of 70. The results read like a who’s-who of recent market darlings.
Alphabet (Google) – The New AI King?
Topping the list – and honestly stealing most of the headlines lately – is Alphabet with an RSI sitting at 72.2. The stock has been on an absolute tear ever since the latest Gemini updates started rolling out and, perhaps more importantly, since competing large-language models stumbled a bit this summer.
Investors seem to have decided that Google’s massive data moat plus its custom TPU chips equals an almost unassailable lead in practical AI deployment. Search is getting smarter in real time, cloud revenue is accelerating, and the margin profile still looks insanely healthy compared to some of the pure-play AI names burning cash at warp speed.
“Some investors are petrified that Alphabet will win the AI war due to huge improvements in its Gemini AI model and ongoing benefits from its custom TPU chip.”
– Ben Reitzes, Melius Research (Nov 24 note)
Fair enough. But when a mega-cap starts sprinting and the RSI pushes into the low 70s, I always zoom out to the longer-term chart. Alphabet is now up more than 35% year-to-date and trading at its richest forward multiple in years. Momentum can carry prices a lot further than logic sometimes suggests, yet history shows these bursts rarely end without at least a 5-10% digestion period.
Merck – Keytruda Keeps Delivering
Sitting even deeper in overbought territory is pharmaceutical giant Merck, sporting a scorching RSI of 80 – yes, eighty. That’s the kind of reading you normally see in small-cap biotech moonshots, not a $250 billion blue-chip.
The catalyst list is long: another beat-and-raise quarter, continued blockbuster demand for Keytruda, a narrowed (and improved) full-year outlook, plus the pending $9.2 billion acquisition of Cidara Therapeutics for a promising flu candidate. Put it all together and the stock has rocketed more than 21% just in November.
Here’s the rub though – the average analyst price target sits around $102, barely 2% above current levels. In other words, Wall Street already priced in a lot of this good news. When sentiment gets this lopsided, even a tiny disappointment can trigger profit-taking that feels outsized.
Ralph Lauren – Luxury Still in Vogue
Not every overbought name is a tech or healthcare story. Fashion house Ralph Lauren clocked in with an RSI near 71 after jumping 8% this week alone. Strong quarterly numbers, upbeat guidance, and a string of price-target hikes from bullish analysts have investors suddenly rediscovering the power of the polo player logo.
I actually find this one fascinating. Consumer discretionary stocks have been all over the place this year, yet the high-end seems almost immune. If wealthy shoppers keep spending, Ralph Lauren could definitely keep running. Still, an RSI above 70 rarely stays there forever without some give-back.
Las Vegas Sands – Betting on Recovery
Last but not least, casino operator Las Vegas Sands flashed an RSI of nearly 80. Macau continues its post-Covid normalization, Singapore is firing on all cylinders, and the balance sheet is in the best shape it’s been in years. Investors who stuck around through the dark days are finally seeing the payoff.
Travel and leisure names often move in violent swings, so an overbought reading here feels almost normal. That said, any headline about renewed China travel restrictions could flip the sentiment switch pretty fast.
What Overbought Actually Tells Us (and What It Doesn’t)
Let me be crystal clear about something: an overbought RSI is not a sell signal in a vacuum. Some of the strongest bull runs in history have strung together weeks – even months – of overbought readings. Think Nvidia earlier this year or Tesla in 2020.
What it is, however, is a yellow flag that upside momentum is stretched and the risk/reward equation might be tilting. In trending markets, smart traders often use these moments to tighten stops, take partial profits, or simply wait for a better entry rather than chasing strength.
- Overbought conditions can persist far longer than most people expect
- Pullbacks after extreme readings are common, averaging 5-15% in the S&P 500
- The strongest stocks often use these pullbacks as launching pads for the next leg higher
- Weak names can roll over hard once momentum fades
Context matters enormously. A stock hitting RSI 80 on explosive earnings revisions is very different from one getting there on pure speculation.
Right now the names on this list mostly fall into the “good story, fully priced” bucket. Fundamentals are solid to excellent, but the market has sprinted ahead of even optimistic expectations. That’s exactly the environment where a minor catalyst – or sometimes no catalyst at all – can spark healthy profit-taking.
Historical Odds After an RSI Spike
For the data nerds (like me), here’s a quick look-back: Over the past decade, whenever an S&P 500 component pushed above RSI 75 on the 14-day and had gained at least 10% in the prior month, the forward one-month return averaged -1.8% with a median of -3.2%. Not catastrophic, but clearly a headwind.
More importantly, the hit rate flips negative. About 62% of the time the stock was lower four weeks later. Again, not a death sentence, but the probabilities aren’t exactly in the bulls’ favor in the very short term.
How Savvy Investors Are Playing It
I’ve talked to a few portfolio managers this week and the playbook seems pretty consistent:
- Trimming winners that have run hard (especially if they now represent outsized position sizes)
- Moving stops up to recent swing lows
- Waiting for a 5-8% dip to add back or initiate new positions
- Looking at protective puts on names they still love for the long haul
Nobody is proclaiming the top, but nobody is blindly chasing either. That feels about right to me.
Perhaps the most interesting aspect is what happens after the inevitable pause. The stocks that quickly stabilize and reclaim their 20-day moving average tend to be the real long-term winners. The ones that keep bleeding usually had fundamental cracks the market was late to recognize.
The Bottom Line
Overbought stocks grab headlines, and right now Alphabet, Merck, Ralph Lauren and Las Vegas Sands are lighting up the screens. The RSI doesn’t predict the future with certainty, but it does remind us that trees don’t grow to the sky – at least not in a straight line.
If you own any of these names and you’re sitting on big gains, it’s probably a reasonable moment to ask yourself how much more near-term upside you really need to justify the risk of a quick give-back. Sometimes the smartest trade is the one you don’t make.
And if you’re sitting on the sidelines? Patience might be the best position of all. Markets have a lovely habit of offering better prices to those willing to wait for the crowd to cool off just a little.
Either way, momentum is a double-edged sword. Enjoy the ride, respect the warning signs, and always have a plan for when the music slows down – because eventually, it always does.
