Despite recent market strength, Canaccord’s Tony Dwyer believes a 5% to 10% pullback is underway

Canaccord Genuity’s Tony Dwyer sees a market setback ahead.

Even though stocks are kicking off February in rally mode as the Reddit frenzy collapses, he believes a 5% to 10% pullback is already underway.

“We’ve been looking for a correction,” the firm’s chief market strategist told CNBC’s “Trading Nation” on Tuesday. “We’re in a slow spot.”

According to Dwyer, the pullback started in November as the reflation trade was peaking relative to the market.

“During the September swoon and the late October whoosh, that was the time to be getting aggressive and add exposure in the economic improvement trade,” he said. “Everybody started chasing that in late December and January.”

But he’s not turning bearish.

“A mistake people could make here is by becoming overly negative in anticipation of a correction,” said Dwyer.

He lists monetary and fiscal policies for a positive backdrop and the benefits of low interest rates.

“The one that people don’t think about is the interest rate expense stimulus refinancing — refinancing your mortgage as a household or as a company refinancing corporate debt,” added Dwyer. “That’s a big cost savings.”

On down days, Dwyer is targeting groups that should profit from excess liquidity and a synchronized global recovery. His top plays include emerging markets, small caps, cyclicals and economically sensitive commodities.

“You want to add exposure into weakness,” Dwyer said. “We’re early in this economic recovery.”

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