- Investors should "be wary" of a potential stock market sell-off, according to Fundstrat's Tom Lee.
- He highlighted in a Wednesday note why stocks could sell off in the coming weeks.
- "We believe investors just simply need to be vigilant," Lee said.
A potential stock market sell-off is imminent, according to one of Wall Street's most reliable bulls.
Fundstrat's Tom Lee has been one of the most bullish strategists on Wall Street when nobody else was, and his forecasts have made investors who followed him a lot of money. That's why Lee's warning in a Wednesday note stands out.
While Lee is still bullish on stocks for the second half of the year, he sees worrying signals that led him to issue a tactical warning of a potential sell-off in the coming weeks.
"Markets in holding pattern until the July jobs [report] and July CPI. But be wary," he said. "Overall, we are entering August just a bit more wary than other months."
Lee noted that Friday's upcoming jobs report could be stronger than expected, and if so that could lead investors to question whether or not the Federal Reserve really is done with hiking interest rates. The market is currently expecting that the Fed is finished with hiking interest rates, so any change in rate hike expectations would be a negative surprise to investors.
Also not helping the market over the next few weeks is seasonal data, which shows that the month of August and September are weaker than most other months in terms of stock market returns.
Carson Group's chief market strategist Ryan Detrick hit on this in a recent note, arguing that "stocks could finally take some type of a break" because of how weak the seasonals are for the months of August and September. "We believe a modest pullback of approximately 5% would be perfectly normal," Detrick told clients in a Tuesday note.
That, combined with the fact that many Wall Street strategists are chasing this rally and raising their year-end price targets for the S&P 500 after its strong year-to-date gain, suggests that stocks could be due for a slowdown.
But perhaps most concerning is a technical sell indicator that just flashed for the stock market. Lee highlighted DeMark Analytics' "13" sell signal just flashed.
The index measures the New York Stock Exchange's percentage of stocks above their 200-day moving average and is a gauge of momentum on the stock market.
The more stocks that are above their 200-day moving average, the better. But the flashing of the "13" signal via DeMark's proprietary technical indicators suggests a reversal in the stock market could be imminent.
The last three times this signal flashed over the past year, stocks suffered a painful sell-off: on August 17 the S&P 500 went on to fall 19%, on December 1 the S&P 500 went on to fall 8%, and on February 2 the S&P 500 went on to fall 9%.
"This topping '13' of this index could be a sign of a larger period of turbulence. But for now, we believe investors just simply need to be vigilant," Lee said.