Big bull Tom Lee admits: 'August scares us' and here's why

Big bull Tom Lee admits: 'August scares us' and here's why

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Big bull Tom Lee admits: 'August scares us' and here's why

Big bull Tom Lee admits: 'August scares us' and here's why

Big bull Tom Lee admits: 'August scares us' and here's why

Big bull Tom Lee admits: 'August scares us' and here's why - here are the reasons??

Strategist Tom Lee is known for perennially serving as one of the biggest bulls on Wall Street, but when asked about the month ahead, he's striking a markedly cautious tone.

"August scares us," the co-founder of Fundstrat Global Advisors said Monday on CNBC's "Trading Nation." He pointed to two troubling stats in particular.

Lee observes that going back to 2009, the S&P 500 has fallen an average of 6 percent during the month of August — a stat that jibes well with the "sell in May and go away" line of thinking.

This adds up to a "pretty scary" outlook for next month, Lee said. However, after an August slip, Lee expects a fall rip.

Or, as the strategist memorably put it in a recent note to clients: "sell the beach, buy the teach."

More specifically, Lee says that once the S&P falls to 2,100, "we think you should buy it," in anticipation of a substantial rally to Lee's 2,325 year-end price target. It closed Monday at 2,168.48.

Indeed, the long-term minded "shouldn't do anything, because a 2 to 3 percent sell-off isn't enough to warrant a big shift in a portfolio. But 2 to 3 percent for an active manager is relative performance."

Further, the odds of a slip could be even greater this year, given that "the bond market has become a lot more volatile than equities, and whenever this happens, 68 percent of the time, the stock market falls in the following month."

Here is a daily chart of BONDS....man, Oh, Man, what a rollercoster ride ey? You can see the rising support line has been touched a few times but now. Hmmmmm. So its safe to say we are at a make or break area. 

Big bull Tom Lee admits: 'August scares us' and here's why

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Don't be fooled! Spotting a phony rally

Don't be fooled! Spotting a phony rally

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Don't be fooled! Spotting a phony rally

Don't be fooled! Spotting a phony rally

Don't be fooled! Spotting a phony rally

so are we dealing with a market situation right now that is saying HEY YOU - Don't be fooled! Spotting a phony rally . Well, its something to look at because lately the market is just having a terrible time of trying to let the bulls out of the gates. Infact when you look at the charts, we have been just going sideways for months now, and many investors are either nervous, or do not know what to do. Have a look at the daily chart for the S&P 500....what a weird sideways pattern, and the BREXIT mess a week ago, did not help the situation.....

Don't be fooled! Spotting a phony rally

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We understands technicals play a vital role in understanding if a big move is the real deal.

"Why do charts work? First, you must consider them as if they are footprints at a scene of a crime. These footprints trace out what big money managers might be doing with their buying and selling of stocks,"

The second reason to care about charts is that we find there is a remarkable self-fulfilling nature of charting stocks. Some of the best investment ideas can come from chart inspired brainstorming sessions — though  that the best way to produce results is with a careful melding of both fundamentals and technicals. When you do it together, its just gets more powerful really.

Good technical analysis means being able to find the indicators that will help to determine the overall direction of the market, especially since so many stocks are influenced by the S&P stock futures.

What indicators does We watch for?

Sometimes technicians start by comparing the chart of an individual company to the chart of an average to determine the legitimacy of a move. This is what is known as confirmation.

For instance if the Dow Jones Industrial Average hit a new high, historically it is not sustainable unless the Dow Jones Transportation Average also hits a high, or confirms the breakout status of the Dow itself. So, if both the industrials and the transports hit a new high, we will consider the move to be one we can bless as being legitimate.

Other indicators that we will watch for are the banking index, the housing index, the semiconductor index, or the SOX and RTH, the ETF that encompasses large retailers.

W like to see all of these indices move up in sync before I truly bless a market move. You get all of these indices rolling higher, and you have to put the maximum amount of chips on the table.

The inverse is also true. If there is a move up without confirmation from a majority of the indices, then the whole rally could be fake and cannot be trusted.

We saw this occur right before the Great Recession, when there was no participation from the financials, retail and tech.

Additional internals that we look at are advances and declines, as they will indicate if a rally is too concentrated. We like to have a market with good participation from many different groups. He also looks at the new high to new low ratio, since it isn't easy to get on the new high list.

You may not be a technician but you need to know what the charts are saying and you need to know how to read the internals to verify a real move or a phony one, right now this chart is giving mixed signals to us, but the bulls surely are not going full bore here, and that is something to be a little bit more worried about.

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