One of the worst-hit industries last spring was the apparel retail group. When malls across America were shut down, traditional mall-based retailers were hit with a complete halt to in-person revenue. Some retailers were able to make up some of the lost revenue via digital sales, but in most cases, the digital sales were nowhere near enough to completely make up for the revenue lost.

While apparel retailers saw their stocks drop drastically in Q1 of 2020, most of them have also seen their stocks make incredible rallies over the past year. A number of them are up over 300% even 400% or more in some cases. This has put a number of stocks in overbought territory on different levels.

Earlier this week I was going through daily, weekly, and monthly charts for a number of different companies and different industries. When I started noticing the number of apparel retailers on the list of overbought stocks, I needed a way to narrow down the list. Using Tickeron’s fundamental analysis screener, I narrowed my focus down to two companies—American Eagle Outfitters (AEO) and Tapestry (TPR).

The reason these two stocks stood out was a combination of fundamental and technical factors. On the fundamental side, both American Eagle and Tapestry had four negative marks among the seven different categories. Both rank poorly in their Outlook ratings, their P/E Growth Ratings, and the Seasonality Score. American Eagle ranks poorly in the SMR rating and Tapestry ranks poorly in the Profit vs. Risk rating category.

The only positive mark for American Eagle is its Valuation rating. Tapestry gets two positive scores, the SMR Rating, and the Price Growth rating. The SMR rating is almost a neutral rating with a score of 33.

Tremendously Overbought Readings on the Monthly Charts

Both American Eagle and Tapestry experienced a little downturn in the last week or so and that brought both of the daily charts out of overbought territory, but they both remain in overbought territory on the weekly and monthly charts. The monthly charts are what really jumped out at me and told me exactly how overbought the stocks are, specifically the 10-month RSI and the monthly stochastic indicators.

For American Eagle, the 10-month RSI is just below the 80 level while the stochastic indicators are right at 90. The stochastic indicators are in the process of making a bearish crossover at this point.

If we look at the last three times the RSI was in overbought territory and then the stochastic indicators made a bearish crossover, the stock dropped sharply. This scenario happened in late 2006 and the stock dropped from over $20 down below $5. The same setup happened in 2012 and the stock fell over 50% in two years. It happened again in 2018 and the stock dropped from over $27 to under $7 and it took less than two years.

The same pattern appears on Tapestry’s chart, but the outcomes aren’t as clear. We see that its RSI is just below 75 and the stochastic indicators are both right around 90. Like American Eagle, the stochastic indicators are making a bearish crossover at this time.

We see the same pattern in April 2018 and previously in April 2012. There was also an instance where both indicators were in overbought territory in mid-2017, but the RSI was barely in overbought territory.

From the high in 2012 through the low in 2015, the stock dropped 62.2%. From the high in 2018 through the low last spring, the stock fell 80%.

One thing that is different on Tapestry’s chart is the trend line that connects the highs from 2012 and 2018 is now connecting the high from this month. This is another factor in why I suggest that investors should be cautious on the stock.

It’s Nothing Personal

I have been writing about stocks and the overall market for over 20 years now. Many times when I write a bearish, or even cautious piece about a stock, I often get comments that question my thinking. My guess is that the people making the comments are stockholders in the company. And rather than reading my analysis with an open mind, they view my bearish stance as an attack on the stock. It’s not personal, it’s just that when I look at the overall picture—the fundamentals, the charts, and the sentiment, I can only come to one of three conclusions. I can be bearish, neutral, or bullish. If I write a bearish piece, it’s because the statistics and patterns support that conclusion. That’s one reason I never write about a stock or ETF that I own. I want my analysis to be completely objective.

In the case of American Eagle and Tapestry, the fundamentals aren’t very good overall, and then the patterns in the oscillators suggest that a downturn is imminent. The sentiment analysis isn’t much of a factor when it comes to these two stocks. The analysts' ratings on American Eagle fall in the average range and they are a little more pessimistic on Tapestry than the average stock, but the short-interest ratio on Tapestry cancels that out because it is lower than average. The short-interest ratio for American Eagle falls in the neutral range.

My suggestion is to take profits if you own American Eagle or Tapestry. If you bought anywhere from six months to a year ago, you are sitting on some big gains. You don’t have to close the whole position, but you can sell part of the position to lower your exposure and hang on to the rest of the position. This suggestion is based on what the fundamental and technical indicators are telling me at this time, not any personal feelings about either company. That’s one of the things I appreciate most about Tickeron and its ratings—they are based on artificial intelligence, not a personal opinion.