Hedge fund veteran Tom Lee says the stock market is trading above its fair value and could witness an abrupt correction.
In a new CNBC interview, the managing partner of Fundstrat Global Advisors says the stock market is flashing a bearish signal after rallying nearly 20% within four months.
While Lee says a market pullback is within the realm of possibility, he believes the correction does not necessarily mean that the longer-term uptrend is over.
“The market’s definitely overbought. We’re 13% above the 200-day moving average. In the past, that’s a sign of a strong market, but it is also a market that is vulnerable to bad news.
I’m kind of sympathetic to the view that there are signs of a correction… But on the flip side, I think there are too many who are quickly calling this the top. That puts me in the camp that whatever weakness we have may end up proving to be shallow.”
Lee also says that any correction will likely be a phase of market consolidation where investors rotate their capital to other stocks that have yet to have a major move this year.
“I think profit-taking is healthy because that’s going to be part of the investor mindset. Investors who have been involved with tech and FAANG (Facebook, Amazon, Apple, Netflix and Google) are enjoying pretty stupendous returns year-to-date. Now, it doesn’t mean that when they take profits, they have to necessarily exit the markets.
To me, next week… if the Fed surprises us in a way because it’s more of a dovish pause, I think investors are going to look for ways to find stocks that rise on easing financial conditions. They may not come back to the FAANG. They might stick with tech, but they might broaden out to industrials and financials.
So yes, profit-taking, but it doesn’t mean the market has to go down.”
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