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One market analyst says a stock pullback ‘may lie directly ahead’

One market analyst says a stock pullback 'may lie directly ahead'


One market analyst says a stock pullback ‘may lie directly ahead’

Traders work on the floor at the New York Stock Exchange.

Brendan McDermid | Reuters

While markets were hitting all-time highs yet again on Tuesday, Canaccord Genuity says it’s time for a market pullback.

Canaccord’s major indicators are approaching levels last seen right prior to or during the market correction in May, the firm said in a note to clients, suggesting a similar correction is coming.

“The S&P 500 has reached into a level of overbought territory that suggests a period of consolidation and increased volatility may lie directly ahead,” Canaccord Genuity analyst Tony Dwyer said on Tuesday.

The S&P 500, along with the other major indices, have been on a tear, with the S&P 500 up more than 20% since the start of the year and more than 6% so far this quarter. The index hit an all-time intraday high at 3,017.80, and record close at 3,014.30 on Monday. The Dow rolled over Tuesday after hitting another record on some bearish trade comments from President Donald Trump.

Diminishing market participation, low volatility, extreme overbought stock levels and increased optimism are all indicating a market pullback is looming, Dwyer said.

Dwyer said stock participation is dropping, suggesting the market has already started to correct internally.

Dwyer noted the percentage of S&P 500 companies above their 10-day and 50-day moving averages are currently around 65% and 84%, respectively, but “the percentage above the 50-day is toward an overbought extreme, while the percentage above the 10-day has been dropping.”

The CBOE Volatility Index (.VIX), known as the best gauge of fear in the market, has recently been trading at a “complacent level” of 12, which is where it stood right before the correction in May.

Further, Cannaccord’s “14-week stochastic indicator” has returned to an extreme overbought level of 98 out of 100. Dwyer said “such a level of overbought in a bull market isn’t a negative thing, just a sign that it is time for a breather.”

Lastly, investor optimism has risen to a complacent level of 56.7% heading into earnings season.

Dwyer said any imminent weakness should be “limited and temporary” and will “provide a more attractive entry point for a move toward our 2020 target of 3,350.”

— with reporting from CNBC’s Michael Bloom.

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