5 Bearish Stocks That Are Extremely Overbought and Ready for Fundamental Reshuffles in the Short Term

The S&P 500 has been hovering around 6,000 since November, driven by inflation concerns and the looming risks of Trump's tariffs, along with the lack of blockbuster earnings from the Mag 7. However, the valuations and technical strength of some giants are stretching into extremely overbought territory, despite the mild sentiment, and may face a fundamental reset in the short term.

1. Meta

Meta has risen for 18 consecutive trading days at the time of writing. The primary bullish force comes from Meta's AI monetization efforts, with 21% sales growth but 50% EPS y/y in Q4. Additionally, DeepSeek's revolutionary reasoning model structure could benefit Meta by building its own AI models at a much lower cost. It wouldn't be surprising if Meta's market cap soon breaks $2 trillion, or another 9%, as psychological marks often favor investors.

However, technical indicators suggest that the bullish sentiment may be overstretched, and investors should exercise caution. For example, Meta's current RSI has remained above 96, an extreme level not seen since May 2, 2017, when the RSI was close to 95. A pullback in RSI doesn't necessarily accompany sharp stock declines, but extreme levels indicate short-term enthusiasm is over-frenzied and may need to rest soon. For instance, Meta dropped 6% in two weeks when RSI reached extreme levels in 2017, showing volatility as investors digested the momentum and prepared for the next wave.

Therefore, the enthusiasm for Meta may need to cool down a bit, but the question is when. Given the current valuation hype, unloading a portion seems reasonable. If the frenzy supports Meta's cap closer to $2 trillion or briefly breaks that level, it could translate to a strong sell signal, as many funds may set limit sells, and retailers may cash out.

2. Palantir

Palantir has been a shining star in recent years, with stock jumping 341% in 2024 and 55% already in 2025, marking it as one of the best-performing stocks in the S&P 500. The stock is mainly driven by AI hype, with expectations that U.S. defense and commercial sectors will aggressively integrate AI, supported by co-founder Peter Thiel's deep relationships with Trump and Vance.

However, the fundamentals lag behind the valuation. Palantir's forward P/S is as high as 71, a metric mainly used for SaaS companies. For reference, another prominent AI stock, ARM, has a forward P/S of about 41, and AppLovin, which jumped 700% last year and ~50% so far, has a forward P/S around 30. These comparisons make Palantir's valuation appear excessively expensive.

The compensation for fundamental growth is also not attractive, with sales growing 36% y/y in Q4, mainly due to commercial sales growing 64%. There are also doubts about how government revenue will grow as Trump and Musk restructure the government and remain cautious on spending. Peter Thiel's relationship with Trump is not clear enough, as he has stayed out of the public eye for a while and did not publicly support Trump in the 2024 presidential election as much as in 2016.

Additionally, Palantir's technicals are slightly stretched, with RSI at 81. Thus, the pullback is more likely to be based on fundamental factors rather than a strong technical action for now.

3. CrowdStrike

Similar to Meta, CrowdStrike's technical levels are quite overbought, with RSI surging to 89, a level last seen in September 2024. At that time, CRWD corrected 9% in two weeks. It is also noted that CRWD's investor sentiment is top among cybersecurity stocks (Okta, Datadog, Zscaler), translating to more alpha premium. The company is scheduled to release earnings on March 4th, and for the last two quarters, the stock has typically faced short-term corrections post-earnings, warranting investor caution.

4. Costco

Costco has been soaring recently, as Trump's tariff risks and soaring food prices may lead consumers to flock to big retailers due to their pricing power, aligning with investor thoughts. However, the safe-haven effect may alleviate as investors start to digest the bad news, and soaring food costs and tariffs will eventually diminish retailers' profitability. This is also reflected in the charts, where RSI around 85 is a bit high, but the main issue is that the MA(3) is decelerating while MA(7, 10) continues rising, making an inverted (or death cross) possible.

5. Nvidia

Unlike the above four stocks, Nvidia is not in the overbought area; however, its technical outlook remains weak and gloomy following a 17% tumble on January 27th. This is due to the dominance in AI being challenged by DeepSeek's much cheaper AI training costs and oversupply concerns.

Although the stock is bouncing back slightly, it remains 8% below the pre-DeepSeek level. Current charts show MA(3) is decelerating, with a possible lower-high formation. From a fundamental perspective, while most cloud providers are ambitious about boosting AI spending this year, many are shifting to ASIC chips with Broadcom, including Apple, Google, Amazon, etc. Additionally, OpenAI has indicated that ASIC chips are nearing final design and ready for mass production with TSMC as soon as later this year.

Although Nvidia's dominance in AI remains strong, increased competition may deteriorate pricing power. In the mid to long term, the cost of training AI should decrease, with more inference and application required, eventually shifting focus to software, algorithms, etc. Nvidia should prepare for this transition.