Don't Sell This Overbought Blue Chip

Nvidia and the rest of the "Magnificent Seven" tech giants have continued to dazzle investors. But they aren't the only stocks worth talking about right now...

Many of the largest stocks outside the Magnificent Seven are moving higher, too.

One of those companies is Berkshire Hathaway (BRK-B), Warren Buffett's holding company. The stock is up 12% so far this year. That's double the return of the overall market.

However, the big rally recently pushed the stock into wildly overbought levels.

Normally, this would be a cause for concern. But for Berkshire, it's a sign that the big gains can continue. And it means you shouldn't sell this overbought blue-chip stock...

Berkshire Hathaway holds mostly "boring" businesses... from insurance to railroads to real estate. But these days, the stock acts like it's at the forefront of the artificial-intelligence revolution.

Shares are up 27% over the past year. They've been hitting new all-time highs in 2024. And we've even seen a double-digit rally since the year began.

That outpaces the overall market by far. And this success has caused the stock to hit overbought levels.

We can see this with the relative strength index ("RSI"). This measure looks at the recent move and tells us if prices have moved too far, too fast in either direction.

Specifically, an RSI reading of 70 or higher means a stock has gotten ahead of itself. From there, a slowdown – or even a correction – can occur.

For Berkshire, its stock recently hit an RSI of more than 80. Take a look...

The stock has been soaring. And the recent rally has pushed Berkshire into massively overbought territory.

You'd be wrong to think lower prices are on the horizon, though...

You see, when world-class stocks soar, it doesn't always signal a coming crash. Instead, it usually indicates strong business fundamentals. And that means more gains can occur.

That has been the case historically for Berkshire. The stock has hit an RSI of 80 or higher 25 times since 1987. And those setups led to outperformance. Check it out...

Berkshire is one of the world's best businesses. And the stock has been an incredible long-term performer for investors. They've seen annual gains of 15.6% over the past 37 years.

But buying after setups like today's works out even better...

Similar instances led to 10.3% gains in six months and 18.9% gains over the following year. Plus, the stock was higher a year later 83% of the time.

Normally, we'd expect this kind of overbought RSI to lead to losses. That's often the case for low-quality businesses that are overhyped by the market.

But for a world-class business like Berkshire, a hot stock price tends to mean more gains are on the way.

So if you own Berkshire, these good times are likely to continue. History shows gains of almost 19% are possible over the next year.

Good investing,

Brett Eversole

Further Reading

Many investors are wondering if the current rally is sustainable. But one important market indicator tells us the market as a whole is thriving today. And that strength will likely continue... Read more here.

With stocks hitting new all-time highs, some folks are waiting for a crash. But according to history, that's not likely. Prices tend to keep heading higher after milestones like this. And that's a reason to stay bullish from here... Learn more here