- A stock drop may provide an 'entry point' for investors, Dwyer says -
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 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 yield for example has risen to 1.874%, from 1.691%, withe differential between the benchmark debt and the 2-year Treasury note 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 and the Nasdaq Composite Index 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 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."