Episode 35: Building Wealth Podcast with Steven Sitkowski
AI Stock Volatility, Market Uncertainty, and How to Identify Overbought Stocks
The stock market continues to face uncertainty as inflation remains elevated, technology stocks experience significant pullbacks, and investors question whether the AI boom can sustain its momentum.
But how can investors recognize when a stock has climbed too quickly?
In Episode 35 of the Building Wealth Podcast, Steven Sitkowski examines the latest market developments, including interest rates, AI spending, corporate earnings, and weakening market breadth.
He also answers an important investing question: How do you identify an overbought stock before a potential pullback?
Why Are Technology and AI Stocks Under Pressure?
Artificial intelligence continues to influence the stock market, but investors are becoming increasingly concerned about the enormous amounts of money companies are spending on AI infrastructure.
Steven discusses how several major technology companies have experienced significant declines from their recent highs, even as their investments in AI continue to expand.
One of the biggest concerns is free cash flow.
Companies are committing substantial capital to AI development, data centers, and infrastructure, but investors want to see whether those investments will eventually generate meaningful returns.
Steven explains that while AI could create significant long-term opportunities, companies must ultimately demonstrate that their spending can translate into sustainable earnings growth.
Inflation and Interest Rates Remain Important
Inflation continues to influence Federal Reserve policy and investor expectations.
In this episode, Steven discusses the Personal Consumption Expenditures (PCE) inflation report, which remained above the Federal Reserve's 2% target.
He also highlights the 10-Year Treasury yield, which had fallen slightly below 5% at the time of recording.
However, Steven cautions that lower Treasury yields don't necessarily indicate improving economic conditions. Investors moving money into government bonds during periods of uncertainty can also push yields lower.
Oil prices and geopolitical developments remain important factors to watch, particularly because elevated energy costs can contribute to inflationary pressure.
What Is Market Breadth Telling Investors?
Although the broader market remained positive for the year, underlying market indicators continued to show weakness.
Steven highlights six consecutive weeks in which more stocks reached new 52-week lows than highs.
He also discusses significant declines among several major technology companies, including members of the Magnificent Seven.
This illustrates why looking exclusively at major stock indexes can be misleading.
A market can remain positive overall even while many individual stocks experience substantial corrections.
For investors, understanding market breadth provides additional context about the strength and sustainability of a market rally.
How to Identify Overbought Stocks Using RSI
The educational segment of Episode 35 focuses on overbought stocks and the Relative Strength Index, commonly known as RSI.
RSI is a technical indicator that measures the speed and magnitude of recent price changes on a scale from 0 to 100.
Steven explains that an RSI reading above 70 is generally considered overbought.
An overbought reading doesn't necessarily mean a stock will immediately decline. Instead, it can indicate that the stock has experienced unusually strong buying pressure and may be vulnerable to a pullback.
Steven demonstrates this concept by examining stock charts and comparing rapid price increases with corresponding RSI readings.
In several examples, stocks experienced sharp advances, reached RSI levels above 70, and subsequently pulled back.
Why Sustainable Stock Trends Matter
Steven emphasizes that investors should look beyond whether a stock is moving higher.
An important question is whether that upward movement appears sustainable.
He prefers stocks that demonstrate a more gradual upward trend, with periods of appreciation followed by smaller pullbacks.
By contrast, stocks that rise rapidly without meaningful consolidation can become increasingly vulnerable to selling pressure.
Combining RSI with price charts, moving averages, and broader market conditions can help investors better evaluate whether a stock may be overextended.
The objective isn't to predict every market movement, but to develop a more disciplined approach to evaluating potential opportunities and risks.
Key Takeaways from Episode 35
AI spending and concerns about future returns are contributing to volatility in technology stocks.
Inflation and interest rates remain important influences on market performance.
Weak market breadth suggests that many individual stocks are struggling despite positive year-to-date index performance.
Free cash flow is an important consideration when evaluating companies making substantial AI investments.
The Relative Strength Index (RSI) helps identify potentially overbought stocks.
An RSI reading above 70 can indicate that a stock has experienced unusually strong buying pressure.
Rapid price increases may be followed by corrections or consolidation.
Combining technical indicators with broader market analysis can help investors evaluate risk more effectively.
Episode 35 of the Building Wealth Podcast with Steven Sitkowski highlights why understanding market conditions and technical indicators matters, especially during periods of uncertainty.
From AI investment and inflation to identifying overbought stocks, developing a better understanding of market behavior can help investors approach trading and investing with greater discipline.
Watch the full episode to see Steven demonstrate how RSI can help identify potentially overextended stocks using real market charts.
Want to learn more about stock market education and trading strategies? Explore Market Mastery Group Reviews to discover what students are saying about their experiences learning with Steven Sitkowski and the MMG team.
FAQs
What does it mean when a stock is overbought?
A stock is considered overbought when technical indicators suggest it has experienced unusually strong buying pressure. This may indicate that the stock is overextended and could experience a pullback or period of consolidation, although a decline is not guaranteed.
What is the Relative Strength Index (RSI)?
The Relative Strength Index, or RSI, is a technical momentum indicator that measures the speed and magnitude of recent price movements. It operates on a scale from 0 to 100 and helps traders evaluate whether a stock may be overbought or oversold.
What RSI level indicates that a stock is overbought?
An RSI reading above 70 is generally considered overbought. In Episode 35, Steven Sitkowski demonstrates how stocks that reached RSI readings above 70 sometimes experienced subsequent pullbacks.
How does Steven Sitkowski identify potentially overbought stocks?
Steven examines the trajectory of a stock's price chart and looks for unusually rapid upward movements. He then checks the RSI indicator to determine whether the stock has entered overbought territory, typically above 70.
Does an overbought RSI reading mean a stock will fall?
No. An overbought RSI reading indicates strong recent upward momentum, but it does not guarantee a price decline. Stocks can remain overbought during powerful trends. Investors should evaluate RSI alongside price action, moving averages, and other market indicators.
What is the Building Wealth Podcast with Steven Sitkowski about?
The Building Wealth Podcast with Steven Sitkowski helps investors better understand the stock market, investing, wealth building, options trading, and economic trends. Drawing on more than four decades of experience in the financial industry, Steven Sitkowski shares practical market insights, investment education, and strategies designed to help individuals make more informed financial decisions.
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