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Stocks Face 20% Correction if Rally Cracks: Strategist

The asset-price rally is running out of momentum and will soon crack, which could lead to a 30 percent correction in oil and a 20 percent correction in stocks, Sean Corrigan, chief investment strategist at Diapason Commodities Management, told CNBC.com.

CNBC.com

"Difficult to call the top in here, but we think the first part of next year will be a bit more difficult. There is a potential, once this cracks, for maybe a 25-30 percent correction (in oil prices)," Corrigan said.

When the market finally does crack, the declines could be led by either oil, stocks or a rebound in the dollar, Corrigan said. But when it does, expect a 30 percent drop in oil and a 20 percent fall in stocks, he added.

The stimulus measures brought in by governments to boost the economy and asset prices have been fueling the recent rally through adding liquidity, Corrigan said.

Corrigan believes there is too much good news already priced in by investors and when the flow of upbeat economic data starts to level off, it will bring the recent rally to a halt.

Many market watchers fear that a double-dip in the economy could push the prices of riskier assets lower. But Corrigan thinks that the stock market could correct even if the economic recovery remains intact.

"That's not Armageddon double-doom, but I think the markets could correct even if the economy doesn't," he said.

Investors are getting increasingly concerned about the market's momentum, according to Corrigan. But they don't want to be first to reduce their risk exposure, he said.

"They would rather look stupid in company than prudent in isolation," Corrigan said.

Investors that have benefited from this year's rally will be ready to reduce risk ahead of the New Year in order to maximize their changes of getting a good bonus, Louis Gargour, managing Partner and chief investment officer at LNG Capital, told CNBC.

  • Watch Sean Corrigan interviewed here >>>

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