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 SPX, +0.07% 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 TMUBMUSD10Y, -1.99% yield for example has risen to 1.874%, from 1.691%, withe differential between the benchmark debt and the 2-year Treasury note TMUBMUSD02Y, -1.46% 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 DJIA, +0.33%, and the Nasdaq Composite Index COMP, -0.05% 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 VIX, +2.60% 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.”