Trading Nation

Strategist reveals what the bulls should pray for

Four things to look for in the market
Four things to look for in the market

Tony Dwyer, chief market strategist at Canaccord Genuity, is no bear. With a year-end target of 2,340, he is actually one of the most bullish strategists on the Street. But Dwyer is looking for certain things to happen before being an "aggressive buyer."

"We're kind of in this no-man's-land tactical condition for the market," Dwyer said.

Yet four signs would tell him stocks are "oversold," meaning that market dynamics would grant the brave an attractive opportunity to buy in.

First, Dwyer would look for the 14-week stochastic oscillator to fall to 30 or below. A measure of market momentum that compares an asset's price to its recent range, the stochastic indicator is now at 55.

To Dwyer, that "suggests a neutral rather than oversold condition."

Secondly, he would like to see the CBOE Volatility Index, better known as the VIX, rise to 20 or higher. The VIX measures the prices of options on the S&P 500, meaning that it rises as investors pay more for insurance against the market.

As for the specific level he's watching for, 20 is the VIX's famous long-term average, and Dwyer writes that "a VIX move above 20 has been a sign over the past two years the correction was nearing an end."

With the VIX closing Monday at 14.74, there currently appears to be little fear around stocks.

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Third, Dwyer is watching the moving averages, which smooth recent stock prices over given time periods. Specifically, Dwyer wants to see "the percentage of S&P 500 index components above their 10- and 50-day moving averages drop to 20 percent and 40 percent, respectively."

That would signal a "short-term washout," Dwyer said. But with those percentages closer to 46 percent and 56 percent, that signal, again, is neutral rather than bullish.

Finally, Dwyer wants investors to get less optimistic. Focusing on the Investor Intelligence poll, Dwyer is waiting to see the percentage of bullish newsletter writers fall below 45 percent—or ideally, below 35 percent.

"That's kind of a lagging indicator, because you get to the point where all of a sudden the market goes down, and everybody like me all of a sudden gets less bullish. We want to get more aggressive" when that happens, Dwyer commented.

That measure is now higher than 50 percent, again showing that there's no great opportunity in stocks.

However, as investors watch these crucial indicators, Dwyer would add one caveat.

"I want to be careful to not make it sound like it's a great short trade," he said. "There's no way on this planet, at 17 to 18 times earnings in this fundamentally driven bull market, that's backed by low inflation, an easy Fed and a steep yield curve, that you want to get negative."

That said, investors might do well to "just cut any major sector bets, and kind of go neutral until you get a spring or summer swoon."

And once that swoon comes, to be ready to strike.

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