The intra-day record drop of more than 1500 points on the Dow Monday might be an outlier, but one analyst says to steel yourself for a correction that could take most of February to complete.
Global equity markets will be facing a short-term corrective phase over the next two to four weeks, says Canaccord Genuity analyst Javed Mirza, who points to monetary policy uncertainty and a recent run of bullishness in the markets as signs of a pull-back.
“Given that we anticipate further near-term equity market weakness, we prefer waiting to add exposure,” says the analyst in a Canadian technical comment. “Our list of open thematic ideas is heavily weighted to bond proxies in anticipation of the current corrective phase. Now we do the toughest thing possible. We wait.”
Mirza says that the S&P500, TSX Composite, Nasdaq 100 and Russell 2000 are all on short-term “mechanical sell” signals, which suggests market weakness over the short term, even as the long-term view remains a bull market.
Mirza says a good run in so-called bond proxies last week will likely continue, further signalling a defensive trend in the markets. Especially in the Materials and Energy space, which the analyst sees as crossing over into a “mechanical sell” this week. “The Resource sectors have deteriorated sharply relative to the TSX Composite over the last two weeks, after having put in a strong performance since December,” says the analyst. “Our view over the last couple of weeks has been that a multi-week corrective phase was pending in the Resource space.”
The analyst recommends adding stocks with improving relative strength over the intermediate term, namely Brookfield Property Partners LP (TSX:BPY.UN) and CGI Group, Inc. (TSX:GIB.A), both of which are showing improving relative performance versus the TSX Composite.