3 Overbought Stocks Ripe for a Pullback

Key Points

• Western Digital and Seagate have surged on enthusiasm for AI and data storage, but are showing extreme overbought conditions with RSIs of 87 and 89, respectively.
• Sezzle has rallied over 300% YTD and just crossed into overbought territory with an RSI of 71, signaling a possible momentum pause.
• Elevated RSI levels across these names suggest it may be time for investors to consider locking in profits or waiting for healthier entry points.

The market continues to trend higher, with tech stocks leading the charge once again. Investor appetite for momentum and speculation has surged as major indices flirt with fresh all-time highs, and several individual names have ridden the wave to extended gains. However, as always, not every rally is built to last permanently, especially when technical indicators begin flashing warning signs.

The Relative Strength Index (RSI), a widely followed momentum gauge, is often used to help market participants spot when a stock may be due for a pullback. Readings above 70 are typically considered overbought, and when they stretch into the high 80s or 90s, it can signal that a near-term pullback is highly likely.

Below are three stocks exhibiting signs of being overbought, as indicated by elevated RSI readings, suggesting that investors may want to consider locking in profits.

Western Digital Corporation Heats Up as Its RSI Signals Cooling Ahead

Western Digital NASDAQ: WDC has been on a strong run in recent weeks, driven by enthusiasm for AI-driven demand for data storage and favorable Q3 earnings released in April. The stock has rallied almost 46% YTD and 128% from its 52-week low.

While the long-term outlook for data infrastructure and storage remains positive, the stock’s technical setup is flashing a potential warning. With an RSI of 87, WDC is deep in overbought territory. The stock has also extended significantly above its mid-to-short-term moving averages, increasing the probability of a near-term pullback or consolidation.

Investors might welcome a pullback, however. While the stock is overbought in the near term, it remains undervalued based on its earnings valuation. As of Wednesday’s close, it had a P/E of just 12.5 and a forward P/E of 11.9—quite an impressive statistic given its impressive three-month surge of over 60%.

Seagate Technology Is Among the Most Technically Stretched

Seagate Technology NASDAQ: STX, another major player in the data storage space, has mirrored Western Digital’s rally. The move has been driven by similar tailwinds surrounding AI infrastructure buildouts and recovering end-market demand. STX shares have jumped more than 76% on the year and 140% from their 52-week low, setting new yearly highs and drawing substantial volume.

However, with an RSI reading of almost 90, the stock is among the most technically stretched in the market right now. Much like WDC, STX has sharply extended from its key support levels and is showing signs of being overheated from a near-term perspective.

While the company’s fundamentals are improving and AI-related growth remains a long-term tailwind, the stock’s short-term risk-reward profile is starting to look less favorable. A period of digestion or a pullback toward the $130 range wouldn’t be out of the question, especially as investors potentially look to de-risk and lock in some profits along the way.

Sezzle Inc. Quietly Climbs Into Overbought Territory

Buy-now-pay-later (BNPL) platform Sezzle NASDAQ: SEZL has quietly gained traction in recent months, with its stock up a remarkable 304% year-to-date.

A stellar Q1 earnings report jump-started the move after the company reported a massive earnings beat and revenue jump. However, with the stock trading near all-time highs, an overbought RSI, and a stretched P/E of 58, investors may be looking to lock in some gains.

With an RSI of 71, the stock has just crossed into overbought territory. While not as extreme as WDC or STX, this reading is worth monitoring.

While the company has shown notable growth in gross merchandise volume and profitability in recent quarters, valuations remain rich, and short-term technical exhaustion could lead to a pause in momentum.

Don’t Chase Overbought Rallies Blindly

While the broader market remains strong and themes like data storage, AI, and fintech continue to attract capital, these rallies can also lead to overheated conditions. Western Digital, Seagate, and Sezzle have all delivered powerful upside moves, but their elevated RSI levels suggest they may be due for a breather.

For investors, this could be a time to potentially reduce exposure, take some profits, or wait for better entry points. For long-term investors, keeping an eye on technical exhaustion can provide an opportunity to buy quality names at better prices once the froth clears.