Investors should brace themselves for a sharp drop in stocks following a rally that started in June and moved towards a peak following the announcement of a third round of quantitative easing (QE3) in the United States, David Murrin, CEO at Emergent Asset Management said on Tuesday.
The Dow Jones Industrial Average established a new 52-week high at the start of October before a raft of third-quarter earnings reports sent the index down again in the second half of the month.
Nevertheless, stocks have held on to year-to-date gains. A similar pattern has occurred for the S&P 500.
"There seems to be an assumption that because of QE3 and a program from the ECB that there is no downside risk to equity markets. If you look at leading stocks and the way that the S&P and the Dow have been trading there is the risk of a trap door to the downside and that's something people have ignored." Murrin added that he was skeptical about U.S. equities' ability to continue rising.
"I have a downside bias and in my opinion you should sell corrections to the upside. I think the downside could be very aggressive. People are very biased to the upside and have been complacent when it comes to Western stock markets," Murrin said.
Valuations would get cheaper and cheaper in the longer term, Murrin said.
"In the U.S. we are seeing the beginning of one of these phases where it's just rolling over very quietly and starts to dip to the downside," he said.