Futures Now

Correction coming in 2016—here’s why: Technician

Markets to correct next quarter: Technician

As investors hope for a Santa Claus rally, one technician says jolly old St. Nick won't be able to save stocks from a correction in 2016.

"Our conviction lies that if you do get some seasonal year-end strength here, you want to sell into it," Oppenheimer's Ari Wald said on CNBC's "Futures Now" on Tuesday. "For the S&P 500 we are expecting a correction in the first quarter — that's where our conviction lies."

According to Wald, a correction could be attributable to three main points:

  • The internal breadth of the market remains narrow.
  • We've burned off what were oversold conditions and seasonal strength — large tailwinds for the Q4 bounce.
  • It would be historically consistent for the trend to moderate at the onset of Fed tightening by means of a midcycle correction.

"So for the S&P we expect a correction to 1,900 support, in the coming months," Wald said. "This would mark the lower end of the index's channel connecting the 2014 and 2015 lows."

While Wald does view this as a secular bull market with below-average recession risk, he says a bull market correction would provide a few buying opportunities — especially large-cap tech.

"Large-cap growth in particular is a theme that's worked, it's a theme that continues to work. We think this premium gets placed on growth companies in a low growth world," said Wald. "We think large-cap tech is the sector with the best exposure to that theme. And when you look at the tech sector's relative trend to that of the S&P 500, we see a sector that is still retracing very stark under-performance suffered between 2000 and 2002."

The S&P 500's tech sector has rallied more than 7 percent in the last three months.

"We think that ultimately tech is the area of the market you want exposure to," Wald said.