(Bloomberg) -- U.S. stocks are due for a temporary pullback, according to Canaccord Genuity Group Inc.
An excessive rally in technology shares and high level of optimism toward equities has spurred analysts Tony Dwyer and Michael Welch to cut their market view to neutral from positive.
“Given the equity market’s run higher, the historic overbought condition of the market-leading sector, the new more positive consensus fundamental view” and “a trailing 12-month valuation of 20x for the S&P 500, we think the market is a tinderbox looking for a spark,” they wrote in a note to clients Monday.
At 82, the weekly relative strength index for the info-tech sector has reached a historical extreme for only the fifth time since 1990, and the four previous instances led to an “an almost immediate peak,” the analysts said. Such tops tended to be temporary and the pair will look to switch back to a more bullish mode after any meaningful market sell-off, they added.
U.S. shares have started the year strongly, registering a number of record highs. The S&P 500 has risen just over 3%, with the gauge’s information-technology sector up almost 6%.
Canaccord is watching policy-maker comments from the World Economic Forum in Davos, Switzerland, as well as earnings reports for potential catalysts for a pullback.
Read here for updates on what’s happening in Davos.
“This really isn’t that complicated a call,” the analysts said. “Info Tech has led the market to a position that is excessive and has generated temporary pullbacks in the past.”
(Adds link to Davos updates before last paragraph.)
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