Stock Market Staring At 5% Minor Correction: Canaccord Genuity Strategist


A 5% minor correction is on its way in the stock market. Those are sentiments shared by equity strategist at Canaccord Genuity Tony Dwyer. The sentiments come at a time when the broader market is flying high, the S&P 500 having gained more than 17% since the start of the year.

Overbought Concerns

Dwyer is basing his minor correction thesis on the belief that most stocks are flirting with overbought territories after a recent spike higher. In a research note, the strategist points out that the 14-week stochastic indicator, which measures weekly price relative to highs and lows over 14-week, has risen to overbought territory.

The argument is further supported by the fact that most of the components in the S&P 500 are trading above the 50-day moving average. The median stock in the index is 5% above historical highs further fuelling the correction thesis.

Most stocks are flying high on earnings and revenue growth beating estimates. For instance, 77% of the S&P 500 companies have registered impressive earnings reports that continue to prop market sentiments. Amidst the plethora of positive earnings reports, weak U.S economic data releases could bring to a halt the stock market rally.

Downbeat Economic Data Concerns

Downbeat economic data is the immediate tailwind standing in the way of continued spikes in the stock market. According to Mr. Dwyer, recent economic data has indicated that the U.S economy could be slowing down having caught a cold from developments abroad.

Europe is already struggling with economic growth some of the economies in the block having already plunged into recession. Downbeat economic data from Germany, one of the biggest economies in the economic block, continue to arouse concerns about the health of the global economy.

Given the interconnection of the global economy, there is growing concern that the U.S economy will also feel a pinch. However, Dwyer expects downbeat economic releases to only have a small impact on the bullish momentum in the overall stock market.

According to the strategists, a dovish stance by the U.S central bank is one of the developments that should continue to support the bullish momentum in the stock market. A hike on interest rates most of the time triggers a sell-off in the stock market; as such, hikes trigger a spike in the cost of capital.

Stabilization in global growth is another development that should continue to support stock prices in the medium term according to Dwyer.

“Any pause in the upside should prove limited and temporary. Our 2019 S&P 500 target of 2,950 may prove conservative. And we would view a 3-5% pullback as an opportunity to add exposure in the Info Tech, Financial and Industrial sectors,” explained Mr. Dwyer.

US stocks closed lower in Wednesday trading session after the Federal Policy Chairman Jerome Powell confirmed a slowdown in business and household spending. The Dow fell 162.77 points to 26,430 in response to the report as the S&P 500 also fell 22 points to 2,923. Nasdaq Composite index was also on the receiving hand dropping 45.75 points to 8,049.

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