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A painful January will pave way for new market highs, Tony Dwyer predicts

Market bull Tony Dwyer sees record upside – after one more painful leg lower
Market bull Tony Dwyer sees record upside – after one more painful leg lower

Canaccord Genuity's Tony Dwyer believes a powerful market rally will rise from 2018's wreckage.

But first, investors may face an agonizing and demoralizing next few weeks.

"The market will be down again 20 percent from peak," the firm's chief market strategist said Monday on CNBC's "Trading Nation." "The history of a nonrecession, post-crash environment is: You get a sharp rally off the low for a couple of weeks, four to five weeks later you get a retest, and then you move to new highs."

It's a pattern reflected during the 1987, 1998 and 2011 pullbacks, according to Dwyer.

"We look back over the course of the last 40 years. ... There have only been three nonrecession market crashes as measured by about a 20 percent drop in under four months," he said. "Of those three market crashes, you went back and saw a new all-time high."

Dwyer's comments came as stocks were closing out their worst year in a decade. The S&P 500 fell more than 6 percent in 2018. The index is off about 16 percent from its all-time closing high hit on Sept. 21.

"You've got to do this intermediate-term bottoming process," he said. "Number 1, you want to see a collapse in the volatility. And, number two, you want to see a sharper, even more significant reversal in the than we've had yet."

He predicts that's when a solid re-entry point into the market will emerge, cyclical groups such as financials, information technology and industrials will be positioned to become big gainers.

"As long as there isn't some kind of major collapse in credit from the Fed, something going on extra with the Fed that we haven't already seen, you should be able to make a new recovery high," he added.

Despite his bullishness, he plans to rein in his 2019 year-end S&P 500 forecast of 3,200 due to the damage created by 2018's sharp sell-offs.

"I doubt we'll make it to what my published target is at," Dwyer said.

A demoralizing pullback is coming before stocks can soar to new highs, Tony Dwyer predicts
A demoralizing market pullback is coming before record highs resume: Tony Dwyer