Power-on Stall: Downgrading Stock Market View to 'Neutral' as it is Time to Take Some Profits - Canaccord Genuity

April 13, 2021 9:52 AM EDT

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Canaccord Genuity's Tony Dwyer downgraded his stock market view to “Neutral” as he advises investors to take a step back and wait for a pullback before adding.

The analyst argues that the stage is set for “power-on stall,” a term used to describe a plane ascending until it stops rising and starts to plummet back toward the ground. In this context, the steeper the ascent, the quicker the stall.

In this context, Dwyer argues that a healthy market is heading toward a power-on stall.

“Apart from our relative downgrade in the Financials in mid-March, we have advocated holding onto equity market exposure given the historic level of excess liquidity fueling the synchronized global economic recovery. The comments from the Fed Chair, action in the UST, relative underperformance in the cyclical sectors, and our tactical indicators suggest a healthy market that is heading toward a power on stall,” the analyst wrote in a note sent to clients.

“Again, we believe we are early in a new economic and market cycle but believe a lot of the favorable factors that had us looking for an above-consensus ramp in growth with an economic reopening investment theme have been mostly discounted near term.”

One of the reasons behind the market downgrade is that even Fed Chair Powell started to sound more optimistic.

“We find it very curious that despite the increased optimism and evidence of a more accelerated second-half economic recovery, the 10-year U.S. Treasury Yield loss of upward momentum and the poor relative performance trend for the most economically sensitive sectors suggest the market may be rapidly approaching stall speed.

Moreover, all four indicators that are closely tracked by Canaccord Genuity have reached a level pointing to an overbought extreme and/or too much optimism. Hence, the analyst advises it may be a good time to take a step back and take some profits and wait for cheaper prices.

“We want to be in a position to add aggressively into a >5% pullback if the market does go into a broad based “power-on stall.” It is hard to do that if fully invested, so we would adopt a more neutral position in anticipation of a better entry point,” he concludes.

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