With stocks sitting at their 5-year highs, many investors are wondering what’s next.Peter Lee, Chief Technical Analyst at UBS, recently spoke with Eric King of King World News, and he offered a dire outlook.
According to Lee’s reading of the charts, long-term “mean-reversion” could send stocks plummeting.
Currently, the mean based on Lee’s “1942 trendline” values the S&P 500 at 740.
The S&P closed yesterday at 1,472.
Lee doesn’t think that stocks will return to the trendline right away. But if it does by 2014, the S&P 500 would be at around 850.
Peter Lee: We are about to enter this convergence period, and we suspect in the second half of this year and into 2014 we will see a great deal of major movements in these financial markets. The charts below go back to the Great Depression when we had an 85% drop in the S&P.
The most recent test was the March 2009 low at 666 on the S&P. At that time the trendline was up into the low 600s, at 620, 630. So we were within striking distance during that panic. This 1942 trendline should be somewhere in the 850 area or above by 2014 (this would represent a horrendous drop of roughly 42% on the S&P).
Eric King: “Either way we are in for one hell of a rough ride for equities.”
Lee: “We’re not done yet. Everyone thinks that we’re nearing the end of the bear market, or structural sideways trading market. We suspect we probably have another 5 to 8 years of this. No one wants to hear this call because investors have already been frustrated by the last 13 years.
We have run a number of internal studies dating back to 1800, and the track record has been 100% accurate. Every single time we have overextended market to the upside, we see a ‘mean reversion’ back to normal levels. Again, this is 100% accurate going back to the 1800s.”
Here’s Lee’s chart via King World News:
Photo: UBS via King World News
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