Talking Numbers

BofA Merrill Lynch: Prepare for a 20% correction next year

BofA Merrill Lynch: 20% correction coming next year

This year has been a terrific year for the US stock market. However, one of the world's leading technical analysts says a 20% may be in store.

Since the start of the year, the benchmark S&P 500 index is up nearly 27%. And, since the market bottom in 2009, it's up 167% (that's an average annual growth rate of nearly 23% since March 9, 2009).

(Read: Why 2014 could be a 'record year' for stock listings)

MacNeil Curry, Head of Global Technical Strategy at Bank of America Merrill Lynch, says there are three reasons investors should get ready for as much as a 20% correction in the markets this coming year:

1. The Treasury environment

Curry sees higher yields and higher volatility ahead for US Treasury bonds. "When all of the corrections [in the S&P 500] transpired over the course of the past year, it's been because of the Treasury market," says Curry. "When Treasury yields has started to push higher aggressively, and as fixed income volatility has risen, that has spooked investors in the equity space and lead to a correction in the US equity market."

2. "Old age"

For Curry, the extended trend is now ripe for a correction. "We are in a four year-plus bull trend in the S&P 500," notes Curry. And, the market's momentum is starting to show signs of its older age.

"If you look at new 52-week highs, that has slowly been declining," says Curry. "If you look at the percent of stocks in the New York Stock Exchange trading above their 200-day [moving average], that is starting to decline." While that in and of itself doesn't mean a correction will occur, it increases its probability, says Curry.

(Read: Stock party's punch bowl isn't running dry: Deutsche Bank)

3. Seasonality

The second and third quarters tend to be negative for stocks, observes Curry, though the current year has been an exception. "Seasonality is a tendency," says Curry. "It doesn't happen every time but if you were to look over, say, a 20-, 50-, or 100-year period… it tends to play out over time."

Curry expects these three factors to cause a 10% to 20% correction in the markets. To see how he reached that level for a drop in the market next year, watch the rest of his interview with Talking Numbers in the video above.

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