Overbought October: 7 stocks ready to drop

Traders work on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Traders work on the floor of the New York Stock Exchange.

As the stock market stages a massive rally, a group of companies in the S&P 500 are trading in overbought territory, setting up these names for a potential drop, traders predict.

In the past month, the S&P 500 surged nearly 11 percent, trading within striking distance of its all-time high of 2,134.72 reached in May.

Similar to other powerful rallies, astute traders often look for extreme levels in the market as a way to find buying or selling opportunities. The idea is that — statistically — asset classes tend to revert back to their moving averages after big moves above them.

"Regardless of whether you are bullish or bearish on U.S. stocks, the reality is the market is extremely overbought as measured by the relative strength index," Peter Boockvar, chief market analyst at The Lindsey Group, wrote in an email to clients Thursday. The 14-day relative strength index for the S&P 500 hit the highest level since December 2014 this week.

"While these readings certainly don't stop further gains, it likely reflects a stretched rubber band where maybe we've already seen the year-end rally that the Stock Trader's Almanac has gifted as an enshrined right of market participants for so many years," Boockvar noted on the recent gains.

Here are the stocks where traders may want to take some profits...