3 Stocks in an Overbought Market

(The following commentary comes from an independent investor or market observer as part of TheStreet's expert contributor program.) "It's only when the tide goes out that you learn who's been swimming naked." -- Warren Buffett.

NEW YORK ( TheStreet -- If you believe that a "rising tide lifts all boats" then you will appreciate that the opposite also holds true. Sir Isaac Newton referred to this as "for every action there is an equal or opposite reaction.

There is unquestionable truth in this theory when applied to the stock market, as evident by the recent declines that we have seen upon the conclusion of the first trading week in the second quarter following the bullish run that we enjoyed in the first quarter.

When it comes to stocks, we need to understand that a strong economy can propel even the most challenged business models. In this article, we are going to look at a few stocks that might be on the verge of further pullback and ways to possibly mitigate some risk and exposure to losses.

The benefit of this is that if you are on the sidelines, hopefully you will be able to get an idea for a possible good entry point.

As of this writing, there have been close to 500 separate stocks that have recently reached new 52- week highs, including names such as Apple ( AAPL) and IBM ( IBM) and there are another 100 or so stocks such as Sirius XM ( SIRI), Microsoft ( MSFT) and Intel ( INTC) that are mere%age points away from setting new highs.

So essentially there are almost 700 separate stocks that either have reached new 52 week highs this year or are close to it - these are the highest reported totals since July of last year. As great as these numbers are, the first couple of weeks of trading in Q2 suggests that this is not going to last.

Aside from Apple, looking across all of the indices, the signs of being overbought are apparent on a great majority of the stocks that have recently shown such momentum.


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One example is Sirius XM. I don't think anyone can look at its recent pattern and not come to the conclusion that it had reached overbought territory . A pullback was inevitable.

Now that Sirius announced that its Q1 results will be released on May 1, investors need to consider what is next. As noted previously, not only should this question be asked in relation to its share price, but more importantly, it should be considered as it relates to the company's future - one that continues to involve Liberty acquisition rumors.

If I were long Sirius, I would strongly consider securing profits on any signs of strength leading into the announcement - particularly in the area of $2.35, which continues to serve as my pivot point.

The stock so far as produced almost 30% gain on the year, and investors should not ignore this level of performance and assume more of the same is on the horizon. As far as earnings are concerned, I don't expect many surprises. The company already indicated that it expects churn to increase "modestly." The company should hit its numbers, but (only) doing so will not be enough to keep the stock from selling off on the news.

As down as I have been on Sirius so far on the year, I am not ready to say that the company will not be successful - I just haven't seen sufficient evidence that it wants to be. Many challenges remain - a lot of which have to do with its poor image.

The 1.3 million net subscriber guidance issued during its Q4 announcement was yet another example of an underdog mentality - a pattern that further affirms what I believe to be "long shot" operation as the company could have easily demonstrated some confidence in its ability to execute.

Sirius is an example of the point made by a recent study showing 74% of stocks were over their 200-day trading averages. For investors in these equities, the question now becomes, is it time to be fearful in the market if you follow the preaching of Warren Buffett?

Clearly, the year-to-date sector performances have shown that investors are becoming more decisive about which industries matter the most.

CA Technologies

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The second company on my list is Software giant CA Technologies ( CA). The stock started the year at $20 and now sits just under $27 for a gain of almost 30% after hitting new 52-week highs during the past several sessions.

The question is, what has been the catalyst and is it likely to continue?

CA Technologies is one of the largest independent providers of IT management software. Its shares started to climb when it reported third-quarter earnings that surged 32% while also announcing plans to raise its annual dividend to $1.

I realize that the surge is due to the euphoria over the dividend itself, but there has been no underlying fundamental change in its operations to suggest that the gains are sustainable. That being said, I will concede that its earnings were indeed very impressive.

The company's sales grew 10% to $1.2 billion - the second straight quarter of double-digit growth. It now expects profit for fiscal year 2012, which ends in March, to grow 11% to 13%. While it is fair to expect more upside, I suspect that any overall market pullback will test the stock's 50-day moving average, which is currently at $22 per share. This would be the entry point to target.

Micron Technologies

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The third overbought signal points to Micron Technologies ( MU) is currently trading at $7.22 which represents an increase of 95% from its recent low of $3.97 in October.

Like Sirius and Bank of America ( BAC), Micron clearly touched bottom and the question now is, how long will the run last before the market realizes the fast and furious nature of a 95% surge in such a short period of time? Will it be able to last until my target of $10 is reached?

The sector in which Micron operates has been in a downward trend. But my feeling has been that its shares had been so oversold that it deserved a long. On the flip side, as much as I see its value, I'm inclined to think that it is now overbought.

I first recommended the stock on Jan. 3, when it traded around $6 and since then it has added 30% premiums. Its story is like many other tech and chip stocks that have fallen on hard times due in large part to macroeconomic events.

Micron was beaten up for most of last year, and it didn't help that it recently reported disappointing earnings results and missed expectations that were already "average" at best. It appears that the fortunes of the company are clearly starting to change and the market has taken notice.


The key to market survival is anticipating certain events. As great as bull markets are once you are in them, personally I derive more pleasure from exiting my positions just before the bear markets take over.

At the moment, I am beginning to sense that the tide is beginning to lower a little bit and investors would be wise to dock their boats before the water runs completely dry.
At the time of publication, Saintvilus was long AAPL, INTC, BAC and MSFT. He held no positions in other securities mentioned in this article.