3 Reasons a Correction Is Coming: Merrill Strategist

With the markets up nearly 27% in 2013, investors are wondering what might bring an end, or at least a lull, to the party.

MacNeil Curry, head of global technical strategy at Bank of America Merrill Lynch (BAC), says to expect a negative turn in the second or third quarter of 2014.

Equity markets likely will be affected by three factors, Curry said in an interview on Yahoo Finance/CNBC early Wednesday.

1. The Treasury Environment

Since mid-2012, we’ve been in a rising interest rate environment, he points out. That bear trend remains in effect, and Treasury yields could spike next year into a new range of 3.17%-3.33%.

When there’s a breakout into a new range, investors concentrate on the change.

“When all of the corrections [in the S&P 500] transpired over the course of the past year, it’s been because of the Treasury market,” Curry said. “When Treasury yields have started to push higher aggressively, and as fixed income volatility has risen, that has spooked investors in the equity space and led to a correction in the U.S. equity market.”

“We think the bogeyman is still lurking in the background,” he added, noting that the Treasury market remains “an ongoing source of concern and vulnerability to U.S. equities.

2. ‘Old Age’

The current bull market has been running for more than four years. “I don’t mean that … a correction is imminent, but the advance is maturing,” Curry explained.

“If you look at new 52-week highs, that [number] has slowly been declining,” he said. “If you look at the percent of stocks in the New York Stock Exchange trading above their 200-day [moving average], that is starting to decline.”