The 10 most overbought ASX 200 stocks – Week 7

A2 Milk (ASX: A2M) shares have managed to trade higher in 12 of the last 17 sessions, up 32% to levels not seen since June 2023. The stock has not been this overbought since November 2019, a time when the infant formula sector was experiencing some serious hype.

The 14-day Relative Strength Index is a momentum indicator that measures the magnitude and speed of recent price changes to assess whether or not a stock is overbought or oversold.

An RSI of 70 or above is considered to be overbought, which means the stock is rising too quickly and likely to experience a pullback. Meanwhile, an RSI of 30 or below is considered to be oversold, which means the stock is falling too quickly and is likely to experience a rebound.

Based on this indicator, A2 Milk is the most overbought stock on the ASX 200 with an RSI of 83.

Most Overbought ASX 200 Stocks

'Target price' is an aggregate of broker target prices from Refinitiv. Data of Friday, 9 February 2024 close.

A2 Milk's rally kicked off on 17 January with a 5.5% rally. This coincided with the release of China's 2023 population data. The figures showed a decrease in the world’s second-largest economy for the second consecutive year, down by 0.15% or 2.08 million to 1.41 billion in 2023, as reported by the National Bureau of Statistics. During 2023, there were 9.02 million births, marking a 5.7% year-on-year decline and the lowest recorded since 1949.

While bearish at face value, Citi said the 9.02 million figure was “not as bad as our expectations of 8.5 million and the market’s expectation of less than 8.0 million.”

"A2 continues to trade at an undemanding PE of ~18x which is a ~36 discount to the historical average PE of ~28x," the analyst said.

A2 Milk 12-month price chart (Source: Market Index)

Harvey Norman's run has been quite intriguing. Despite the absence of any market-sensitive news announcements this year, its shares are likely buoyed by the upbeat results of its peers such as Nick Scali, which reported the following:

• 1H24 NPAT $43 million vs. Macquarie estimates of $41 million (4.9% beat)

• Gross margin 65.6% vs. Macquarie estimates of 64% (160 bps beat)

• Interim dividend 35 cps vs. Macquarie estimates of 27.9 cps (25.4% beat)

• January 2024 written sales orders of $58.9 million, up 3.6% year-on-year, continuing the positive momentum experienced in the second-half of 2023

The result highlighted a positive sales trajectory as well as a record gross margin of 65.6%, supported by group sourcing benefits and lower freight costs. The result provided a powerful read-through for retailers, with Harvey Norman shares up 2.3% on the day of Nick Scali's results.

It's also worth noting that Harvey Norman is the 16th most shorted stock on the ASX, with 6.07% short interest as at 5 February. The strong results from peers may have forced some covering for those bearish on retail and HVN.

Harvey Norman 12-month price chart (Source: Market Index)