Breakout

Sorry Bears, The Expected Pullback Will Be Modest: Stovall

Breakout

Stocks continue to defy logic and widespread expectations for an overdue washout, despite the fact that the list of headwinds seems to grow longer by the day. A sluggish economy, political gridlock, tepid earnings, the European debt crisis, high gasoline prices have all been staring us in the face throughout this recovery.

"You're better off watching for a tsunami than you are an earthquake because the lack of volatility usually indicates that it's a matter of when, not if, we're going to have a market decline of 5% or more," says Sam Stovall, the chief equity strategist at S&P Capital IQ, in the attached video. The good news, however, is that although we're overdue for a shakeup, he says "I don't think it's going to turn into a bear market."

He says, a check of economic, monetary, sentiment, earnings and more all suggest a shallower, more subtle pullback is in store, rather than something more sinister.

"We have had either a pullback (5-10% decline) or a correction (10-20% decline) on average every year since World War II," he says, adding that's it's taken us only about 4 months to get back to break even. As a result, his mantra is "it is better to buy than to bail" if the market gives you a more attractive entry point.

That said, Stovall believes we will probably see several attempts to break through the high-water mark of 1,565 for the S&P 500 which was set on October 9, 2007. "But my belief is that we'll at least challenge it (1565) but based on fundamentals, politics, etc, I'm not really willing to call for a brand new high just yet."

And so, as much as he predicts the downside risk looks limited, the upside potential appears to be capped for the short-term too.