Market Jitters May Be Causing Investors To Crowd Into Defensive Stocks Too Much

Amid concerns of a potential recession and the condition of regional banks, investors are seeking safe havens, leading to crowded trades. The S&P 500 experienced its second consecutive weekly decline, falling 0.3%. The SPDR S&P Regional Banking ETF (KRE) dropped 5.2% for the week due to PacWest's report of a significant decrease in deposits, raising fears of similar issues affecting other banks like Silicon Valley Bank, Signature, and First Republic.

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In light of these circumstances, investors have turned to consumer staple stocks, traditionally considered defensive, to strengthen their portfolios. However, some of these stocks have become overbought based on their relative strength index (RSI), a momentum indicator in technical analysis. 

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When a stock's 14-day RSI exceeds 70, it is considered overbought, signaling that investors should consider reducing their exposure. Conversely, an RSI below 30 indicates oversold conditions, indicating a potential buying opportunity.

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Mondelez, PepsiCo, and Molson Coors, all consumer staple companies, are among the most overbought stocks in the S&P 500. Mondelez, known for its Oreo cookies and snacks, has an RSI of 89.2, while PepsiCo and Molson Coors have RSI scores above 84 each. Mondelez shares have gained over 16% year-to-date, outperforming the broader market. PepsiCo and Molson Coors have also outperformed the S&P 500 this year.

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However, analysts believe there is limited upside potential in these stocks at present. The average price targets from analysts imply modest upside for Mondelez and PepsiCo, around 3% for each. On the other hand, analysts expect a 1% decline in Molson Coors' stock price.

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Another stock exhibiting significant overbought conditions is Republic Services, a waste management company that has seen a more than 14% increase in 2023. However, only 40% of analysts have a buy rating on the stock.

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Conversely, there are some stocks that have become deeply oversold. Estee Lauder holds the title of the most oversold S&P 500 stock, with a 14-day RSI of 14.98. The cosmetics maker has struggled this year, losing nearly 20% of its value. Despite the downgrade by Argus Research analyst John Staszak, over half of the analysts covering the stock still rate it as a buy, with an average price target suggesting a potential rally of 21.3%.

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Enphase Energy is another deeply oversold stock, with an RSI of 16.42. The stock has declined by over 36% year-to-date. Bank of America analyst Julien Dumoulin-Smith downgraded Enphase to underperform, citing various challenges faced by the company, including weak distributor channel trends and inflexible cash advance terms. Despite this, the average analyst price target indicates a potential gain of 50% for Enphase Energy.

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Overall, market conditions have led to crowded trades and overbought or oversold conditions in certain stocks, prompting investors to carefully assess their portfolios and consider potential opportunities and risks.

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