Key points
- MongoDB, Eli Lilly and Adobe are among the major stocks retreating into potentially constructive patterns as the major indexes extend.
- It is risky to buy extended stocks; it’s often a better idea to track those who have good earnings estimates and technical support.
- The exuberance around AI has sent indices soaring in a short space of time.
- 5 titles we like best from Adobe
One of the most interesting things for an investor or trader is to look at their level statement or charts of what they own and see a stock like Nvidia Corp. NASDAQ:NVDA or even the broader SPDR S&P 500 ETF Trust NYSEARCA: SPY or Invesco QQQ NASDAQ: QQQ reaching new highs.
The S&P 500 Index has rallied 29.41% over the past year, while the Nasdaq 100 has risen 49.90% over the same period. This indicates that the market is extended and it would not be surprising to see a pullback, meaning investors may be taking additional risks when making a purchase at this time.
Entering overbought territory?
Extended indexes often indicate overbought conditions, where prices may have risen too much too fast, increasing the risk of a subsequent correction.
Additionally, extended indices may reflect greater market exuberance or speculative behavior, which could lead to greater volatility and sudden trend reversals. An obvious driver in this regard is artificial intelligence. The potential here is real, but there’s a chance that investors have been hoarding out of fear of missing out.
However, there are several leading stocks forming potentially bullish formations as they retreat from the highs, making them worth keeping an eye on.
These include MongoDB Inc. NASDAQ:MDBEli Lilly & Co. NYSE: LLY and Adobe Inc. NASDAQ: ADBE.
AI capabilities that drive MongoDB
While it’s prudent to be wary of AI overexuberance, database specialist MongoDB is an example of a stock that has bounced back thanks to AI-powered search capabilities.
The MongoDB chart shows that the stock has retreated over the past three weeks after posting a gain of 9.47% this year. The stock is finding support at its 50-day moving average, a constructive development, as it means institutional investors will likely take profits after a rally, but not bail out entirely.
The stock is currently in a buy zone, as it trades between its 50-day line and its previous high of $509.62.
MongoDB will report earnings on March 7 after the closing bell. The company has been targeting earnings of between 17 cents and 20 cents per share, but any negative news has the potential to send the stock down dramatically; Investors should always use caution in the days immediately preceding an earnings report.
Eli Lilly’s EPS is expected to nearly double
Eli Lilly shares rose to a new high of $794.47, supported by strong sales of weight-loss drug Zepbound and diabetes treatment Mounjaro
Analysts expect Lilly’s earnings to grow 96% this year and another 44% next year.
In the most recent quarter, blockbuster Zepbound generated revenue of $175.8 million, double what analysts expected. Mounjaro’s sales totaled more than $5 billion in its first year on the market.
The company also said that tirzepatide, the basis of Zepbound and Mounjaro, has early clinical trial data indicating potential to treat a type of liver disease that currently has no FDA-approved drugs.
The Eli Lilly chart shows the stock closing in a fairly tight range over the last two weeks. This type of chart action is often a bullish indicator, signaling that investors are holding stocks after a rally, before starting to buy again.
Adobe abandons the 200 day line
Abode shares fell 13% in the week ended Feb. 16, as investors spooked after Microsoft Corp. NASDAQ:MSFTOpenAI, supported by OpenAI, introduced Sora, an application capable of generating sophisticated videos from commands.
Sora, which is still in testing and not yet available to the public, could be a significant rival to Adobe’s Creative Cloud product suite, which includes video creation software.
However, it is a bullish sign that Adobe shares found support at the 200-day mark and began to recover after the company introduced a generative artificial intelligence tool, AI Assistant for Acrobat and Reader, to create summaries of long documents.
Analysts expect Adobe to report a decline in earnings this year, then rebound with double-digit growth in 2025. The decline is due to reduced spending by business users, but analysts see a recovery in revenue as the company rolls out more AI applications.
However, as the recent Sora-led recession shows, cheaper alternatives to Adobe’s suite of products could reduce revenue in the future.
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