After an 'excessive' tech rally, one Wall Street firm is bracing for a pullback in stocks
- On Monday, analysts at Canaccord Genuity reduced their market and tech sector views to neutral from positive as they see a potential pullback coming in stocks.
- The downgrade comes amid "the extreme overbought condition and high level of optimism toward equities, especially in the Information Technology sector," they wrote in a Monday note.
- Still, the analysts said they'd rotate back into a more bullish stance "pending a resolution of the extreme overbought level of the major market indices."
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US stocks could be poised for a pullback, according to analysts at Canaccord Genuity.
This week, Tony Dwyer and Michael Welch of Canaccord Genuity reduced their market and offensive sector views to neutral from positive given "the extreme overbought condition and high level of optimism toward equities, especially in the Information Technology sector," they wrote in a Monday note.
The market and the tech sector have reached a point that warrants a change in view, the analysts wrote. Since the end of 2018, the S&P 500 has gained roughly 33%, driven by the tech sector, which has gained 56% in the same timeframe, according to the note.
Given the equity market's outperformance last year, the overbought condition of the tech sector, and "a trailing 12- month valuation of 20x for the SPX, we think the market is a tinderbox looking for a spark," the analysts wrote.
In addition, the weekly relative strength index for information technology hit 82, a historically high extreme level, for the fifth time since 1990, according to the note.
"The prior four occurrences of such an overbought level brought an almost immediate peak, followed by a median 13.75% drop over the ensuing weeks/months," the analysts wrote. "It is important to note that none of the occurrences were anywhere near 'the' peak, but each was nasty enough to warrant a more neutral position until the sector corrected."
The analysts insist that their retreat on technology is temporary, and note that their fundamentally bullish case in 2019 is now the consensus view. "We would be sector neutral with the intent of putting offense back on the field pending a resolution of the extreme overbought level of the major market indices," they wrote.
The analysts are watching the World Economic Forum in Davos this week for a potential "correction catalyst," according to the note. They'll also be watching for information technology reporting season this week, which will be kicked off by IBM on Tuesday.
"Again, our fundamental core thesis and history do not suggest the market is on the precipice of a major market decline," the analysts wrote. Instead, key tactical indicators point to "an environment ripe for a temporary but potentially nasty drawdown that should provide excellent entry point into equities."
The S&P 500 has gained roughly 3% year-to-date through Friday's close.