Investor sentiment has become 'extremely greedy' and that makes the market fragile, says Fairlead's Katie Stockton

• Investor sentiment is becoming "extremely greedy," according to Farilead's Katie Stockton.
• She told CNBC on Thursday that markets are becoming fragile in response.

After strong start to the year, the stock market now looks vulnerable as investors appear to be overdoing it, according to Fairlead Strategies' Katie Stockton.

January in particular saw some encouraging stock market breakouts, which typically indicate wider participation as a broader range of equities drives the rally, Stockton told CNBC.

But since then, participation has been narrower, with the Nasdaq outperforming the S&P 500 amid heavy reliance on the handful of mega-cap tech stocks. The S&P 500 is up more than 7% year to date, while the Nasdaq is up nearly 15%.

Such outperformance will be fleeting with a relative pullback likely that will set up a test for the market, she predicted.

"Sentiment has now gotten what we call sort of extremely greedy," Stockton added. "You can see it maybe yesterday in bitcoin. That greedy sentiment makes for a fragile tape."

Other market analysts have also noticed signs of a stampede back into the market recently.

The stock market's 20% rally off its mid-October low has sparked a FOMO trade and pulled some investors off the sidelines and back into stocks, according to a note from Ned Davis Research.

"Fear of missing out has made a comeback. Even some investors who doubt the Fed can engineer a soft landing have begrudgingly gotten on board," NDR said.

And Vanda Research found that retail investors have been spending a record $1.5 billion a day on stocks as the 2023 rally sparks fear of missing big gains.

Meanwhile, the breakouts and incremental improvement on stock charts look more short- to intermediate-term in nature, Stockton said Thursday.

"The short-term breakouts have probably already run their course, and it's not yet impacting the longer-term gauges," she added.