Fin - Breakout - US

Stock Sell-Off: Get Used to It, UBS Strategist Says

Jeff Macke
Breakout

If you're feeling a sense of crushing ambivalence about the stock market, these days you're not alone according to UBS chart whiz Peter Lee. After coming into the year with too many bulls, many of whom have been shaken out, we're sitting with a fairly even split between bulls and bears -- with a growing contingent of those who simply aren't ready to open their hearts to stocks again.

Well, we've been in a "trading range" for about two months, and I'm already chewing my leg off in boredom. What on earth is going to shake me out the ennui and make it OK to trade again? It depends on the nature of the overdue bounce, according to our guest. Lee sees the recent expansion of bears, but says traders are still too complacent.

"Buyers are fearful the markets are going down," he says, but shorts are also scared after a 106% rally in the face of an economy that's looking more like one continuous dip in terms of a recovery.

If and when stocks hold support in the 1,220 to 1,250 range on the S&P or break out above resistance from 1,330 to 1,360, traders will have a chance to come back from the beach and trade either a panicked sell-off or a rally into the 1,400's.

Those of you excited about finally seeing an end to what has already become one of the more boring (near) corrections of recent years need to check that enthusiasm. Lee isn't expecting the market to break higher in a sustainable way for at least another five to 10 years. That's how long it's going to take for retail investors to mend the broken hearts incurred by the bear markets in stocks that bookend the last decade. "The last stage of grief is acceptance ... I don't believe investors are at the acceptance stage yet," says Lee.

But investors' sense of hurt and betrayal is natural. Lee has run the numbers since 1800 and says the market is right where it should be in terms of overall sentiment. On the upside, there are plenty of fish in the sea and ample bull markets in the world; you're just not going to to find them moping around in American stocks. Lee says it's fine for investors to get long, for now, commodities and emerging markets across the board, as "we have a structural bull market in commodities (and) probably a bull market in emerging markets."

As for settling down with a market for a long-term relationship, Lee suggests what he calls "frontier markets," places where actual capitalism is just a gleam in the eye. Vietnam, Chile and a few other countries you wouldn't go to without 17 vaccinations and serious personal protection are the next big thing from where Lee is sitting.

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