BCA Research is warning of a “severe correction” threatening Canadian stocks.

In a new research note, the Montreal company warns, “Canadian equities will see further selling pressure if commodity prices continue to correct as we expect.”

“The Canadian equity market rally since late-2002 has been fueled by strong increases in energy and other commodity prices. Since the rally began, stocks have declined each time commodity prices suffered a correction,” BCA said. “This has bearish implications if investors rein in their speculative bets on commodities as the Fed hikes interest rates and the U.S. dollar stabilizes in the near term, as appears likely.”

It said the effects on domestic stocks could be harsh. “Given how dramatic the most recent run-up in commodity prices was, the risk for Canadian stocks is that the unfolding correction could be severe.”