Trading Nation

Don't buy stocks until you see these four key signs, strategist warns

Why one bullish strategist is calling for a correction
The warning of the ‘Northman Trader’
Here's why the 'Trump trade is still intact'

Some things are just worth waiting for.

Canaccord Genuity chief market strategist Tony Dwyer believes that at some point soon, traders will have an attractive opportunity to buy stocks. But he needs to see a few key signs before he's willing to pull the trigger.

When looking at groups like industrials and materials, the "Trump trade" has been losing steam, Dwyer said.

"So this whole narrative that this is the Trump trade, the reflation trade, … it just doesn't work for this year because most of those areas that would benefit, outside of financials, they're not rallying. For me, it's much more, … whatever it takes to get the key indicators I look at to get oversold enough," Dwyer said in a Wednesday interview on CNBC's "Trading Nation."

First, the CBOE volatility index, widely used as a gauge of market fear, would have to climb to 20 or above to signal a buying opportunity, Dwyer wrote in a recent report called entitled, "Starting to get there." Twenty is roughly the VIX's long-term average level.

The VIX currently stands at 12.81, briefly crossing the 13 mark in Wednesday trading for the first time since February. The last time the VIX touched 20 was in November, the day following the presidential election (before ending the session much lower, just above 14).

The second marker is the percentage of S&P 500 components above their 10- and 50-day moving averages dropping to 20 percent and 40 percent, respectively, Dwyer wrote. In other words, too many equities are overbought now, as those numbers currently stand at 64 percent and 68 percent, respectively.

Third, Dwyer is looking at a rather obscure technical marker called the stochastic indicator, which measures an asset's momentum by comparing its closing price to the range of its prices over a given period of time. The 14-week stochastic indicator would have to drop to 30, a far cry from its current level of 87, says the strategist.

And lastly, in a softer examination of the market, Dwyer points to the number of bullish newsletter writers as measured by Investors Intelligence. The most recent survey showed the percentage of bullish newsletter writers had come down a bit from 30-year highs, but at 53 percent, is not nearly low enough to signal that sentiment had turned pessimistic. That figure would have to fall to 45 percent before it changes Dwyer's thinking to buy.

Only if these key levels are reached in the indicators, would he recommend becoming more aggressive in buying equities.

"It's hard to stretch a rubber band that's fully stretched," Dwyer said. "It's a lot easier to do it from a neutral position, and that's really our investment and trading call; we just want to be market neutral until those things get oversold enough."