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Nov. 16, 2019, 11:44 a.m. EST

After nailing a call for a pullback in June, Canaccord’s Dwyer predicts another S&P 500 slide

A stock drop may provide an ‘entry point’ for investors, Dwyer says

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By Chris Matthews, MarketWatch


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The bears may get the upper hand, for now

Canaccord Genuity strategist Tony Dwyer has been bullish on the U.S. stocks in recent years, predicting after rising more than 23% in 2019, the S&P 500 will reach 3,350 by the end of 2020, a more than 8.3% increase from Tuesday’s close.

But Dwyer has also made intermittent calls for pullbacks, including an accurate call on April 30 for a minor retrenchment in the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.86%  to precede a resumption of its upward trajectory. Indeed, from the close of trade on April 30, through June 30 the S&P 500 declined 6.9%, before rising to record highs in late July and again in recent weeks.

He is once again predicting an S&P 500 retracement. “Our core thesis remains positive, with low inflation, an easy Fed, a re-steepening of the yield curve, slowing but positive growth, better-than-expected [earnings per share] and valuation expansion, although the tactical backdrop suggests a minor correction over the near term,” Dwyer wrote in a Tuesday note to clients, referring to a widening gap between interest rates of varying maturities that had flattened in recent months, often viewed as an accurate predictor of coming economic weakness.

The yield of the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +5.51% yield for example has risen to 1.874%, from 1.691%, withe differential between the benchmark debt and the 2-year Treasury note /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +3.56%  at 1.626% widened to about 24 basis points from 17 basis points at the end of October, FactSet data show. Meanwhile, the S&P 500, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.79% , and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.73% have established fresh records since stumbling during the summer.

“The recent string of new all-time highs in the major equity indices have pushed our indicators further into the extreme overbought territory that led to the [pullback in June],” he added.

These indicators include: the percentage of S&P 500 constituents above their 10 and 50-day moving averages are on the decline; low levels of implied volatility as measured by the Cboe Volatility Index /zigman2/quotes/210598281/delayed VIX -7.00%  and increased investor optimism as measured by the percentage of Investors Intelligence newsletter writers expressing bullish sentiment.

Meanwhile, “Our trusty 14-week stochastic indicator is back to an extreme overbought level of 99 on a scale of 0 to 100,” Dwyer wrote.

“Such a level of overbought in a bull market isn’t a negative thing, it’s just a sign that it is time for a breather.”

“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,” He added. “That said, our still positive core fundamental thesis, current valuation level and history of year-end ramps suggest any weakness should prove limited and temporary and provide an entry point for a move toward our 2020 target of 3,350.”

/zigman2/quotes/210599714/realtime
US : S&P US
3,168.57
+26.94 +0.86%
Volume: 2.18B
Dec. 12, 2019 4:20p
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/zigman2/quotes/211347051/realtime
add Add to watchlist BX:TMUBMUSD10Y
BX : Tullett Prebon
1.90
+0.10 +5.51%
Volume: 0.00
Dec. 12, 2019 4:54p
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/zigman2/quotes/211347045/realtime
add Add to watchlist BX:TMUBMUSD02Y
BX : Tullett Prebon
1.66
+0.06 +3.56%
Volume: 0.00
Dec. 12, 2019 4:54p
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/zigman2/quotes/210598065/realtime
US : Dow Jones Global
28,132.05
+220.75 +0.79%
Volume: 273.21M
Dec. 12, 2019 4:20p
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/zigman2/quotes/210598365/realtime
US : U.S.: Nasdaq
8,717.32
+63.27 +0.73%
Volume: 2.16M
Dec. 12, 2019 4:54p
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/zigman2/quotes/210598281/delayed
US : Cboe Indices
13.94
-1.05 -7.00%
Volume: 0.00
Dec. 12, 2019 3:14p
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