Hedge fund veteran Tom Lee says the stock market is trading above 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 sending a bearish signal after rising nearly 20% in four months.
While Lee says a market pullback is within the realm of possibility, he believes the correction doesn’t necessarily mean the longer-term uptrend is over.
The market is clearly overbought. We are 13% above the 200-day moving average. In the past, that was a sign of a strong market, but it’s also one that’s vulnerable to bad news.
I’m somewhat sympathetic to the view that there are signs of a correction… But then again, I think there are too many quick to call this the top. That puts me in the camp that whatever weakness we have will eventually turn out to be superficial.
Lee also says any correction is likely to be a phase of market consolidation in which investors rotate their capital to other stocks that have yet to make a major move this year.
“I think profit taking is healthy because that will be part of the investor mindset. Investors who have been involved in technology and FAANG (Facebook, Amazon, Apple, Netflix and Google) are enjoying some pretty amazing returns this year. Now, this does not mean that when they take profits, they must necessarily exit the markets.
As far as I’m concerned, next week… if the Fed kind of surprises us because it’s more of an easing pause, I think investors will look for ways to find stocks that rise in easing financial conditions. They may not come back to the FAANG. They may stay with technology, but they can expand into industry and finance.
So yes, profit taking, but that doesn’t mean the market has to go down.”
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Image generated: Midway through the journey