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A 10% correction could grip stocks through summer, Canaccord’s Tony Dwyer warns

It may be too early to look for bargains in the market.

According to Canaccord Genuity’s Tony Dwyer, stocks are likely in the midst of a 10% downturn that could last months and hurt the reopening trade.

“You need to reset expectations,” the firm’s chief market strategist told CNBC’s “Trading Nation” on Wednesday. “The areas that have been doing well, the cyclical areas — they just need to take a little bit of a break.”

The market is getting hit this week. The tech-heavy Nasdaq and Nasdaq 100 are now off more than 5% from their record highs. The S&P 500 is down 2% from its all-time high, logged on May 7. This index is on track for its worst month since last October.

Dwyer warns the situation is set up to deteriorate before the next sustainable leg higher can form.

“It’s going to be a strange, kind of, grinding summer … where it’s going to be counterintuitive,” said Dwyer. “The numbers are going to be great. The inflation numbers are going to go up. But you could actually see a little bit of profit-taking in some of those cyclical areas.”

He compares the bearish activity to Big Tech’s performance last August, because investors were gathering on one side of the boat then, too.

“Nobody thought that you would see a stall-out in some of the mega cap infotech names. Yet, they’re at the same prices back then even with way better fundamentals,” he noted. “That’s because it was priced in. I think for the time being, you may be seeing some of that in the cyclicals.”

Five weeks ago, Dwyer downgraded the market to neutral due to overbought conditions. He told investors it was time to take profits.

“What we’ve been looking at is the extreme overbought condition on an intermediate term basis,” Dwyer said. “It’s still overbought.”

Since the March 2020 lows, the S&P 500 and Dow are up more than 85% while the Nasdaq is more than 100% higher.

‘It’s a risk-off feel’

Dwyer sees the bearish activity in the cryptocurrency space as a key example of overbought conditions on Wall Street in general.

“It’s a risk-off feel with the crypto getting hit so hard, and that put pressure on the market,” he added.

Dwyer, a long-term bull, isn’t throwing in the towel on risk assets. He’s confident a more attractive entry point in stocks will appear later this year. That’s when he plans to return to the reopening and recovery trades.

“We’re going to see a little bit of an outperformance of growth over value because they’ve been in such distress over the course of the last few weeks,” Dwyer said. “But I think we end the year back where we are now, with the cyclicals leading.”

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