What to Expect Following a Possible Correction in U.S. Stocks

NEW YORK (TheStreet) -- After trading lower for much of Tuesday morning, stocks are nearing session highs in the afternoon. However, as U.S. stocks continue to decline toward key support levels, many investors are starting to worry about a possible correction. 

Admittedly, Tony Dwyer, chief equity strategist and managing director at Canaccord Genuity Securities, said he's been too early when looking for a correction. However, he expects the Federal Reserve to hike interest rates sooner than most investors expect, causing a selloff in the equities market. 

That said, Dwyer is also looking for a robust rebound following an impending correction in the stock market, with a year-end target of 2,340 for the S&P 500. Stocks still have "pretty solid fundamentals," he explained. Once a 5% pullback is in, he's a buyer of stocks, particularly in financials, consumer discretionary and technology. 

U.S. stocks have been trapped in a "very narrow trading range," according to Josh Brown, CEO and co-founder of Ritholtz Wealth Management. It seems probable that U.S. stocks could go lower, or at least stagnate, while global equity markets continue to outperform. 

Brown did acknowledge that a rebound in financial stocks is very good for the overall market. 

"Technology already looks like it's starting to break down a little bit, at least from what we saw last week," said Pete Najarian, co-founder of optionmonster.com and trademonster.com.

Although technology stocks have become a concern, Najarian said he's "more encouraged by the way the financials are trading." 

Joseph Terranova agreed, pointing out that financials have been the best performing sector so far this quarter. Terranova, a senior managing partner at Virtus Investment Partners, also said he see potential upside in utility stocks after the recent selloff. 

Gemma Godfrey, head of investment strategy at Brooks Macdonald, is also using a recent selloff as a buying opportunity. However, instead of looking at sectors, she's focused on German equities. The DAX has been punished lately and is now in correction territory, she acknowledged. But the index is "oversold" and due for a rally, she said. 

She also pointed out that European-focused exchange-traded funds had more inflows in the first quarter of 2015 than all of 2014, showing that investors continue to put money to work in that region. Specifically, she likes automakers, financials and small-cap stocks in Europe, along with a hedged euro position. 

Terranova reminded investors that the Federal Reserve will hold its June meeting next week. Stocks seem likely to stabilize ahead of that meeting, he said, adding that oil near $60 per barrel is a positive.

Over the next day or two, stocks seem likely to bounce higher, according to Steve Grasso, director of institutional sales at Stuart Frankel. However, he believes a 10% correction is in the cards sometime in the near future.

The conversation turned to Netflix (NFLX), which has done incredibly well this year, up 89%. On Tuesday, the company held its shareholder meeting, which has the stock higher by 3% as investors plan to vote on a possible stock split later in the day. However, Brown said that won't necessarily move the stock higher, but will likely tame the stock's heavy volatility. 

Najarian disagreed, saying a stock split is likely to give shares a boost and could pave the way for higher prices in the future, much like what happened with Apple (AAPL) when its stock split. It'll give retail investors a better opportunity to own Netflix too, he added. 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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