US Markets

Stocks Are Poised for a 5% Drop: JPMorgan's Lee

Stocks Set for Short-Term Drop Up to 5% - Lee

The market has had a strong start to the year with the Dow Jones Industrial Average powering recently to record high after record high. But Thomas Lee, chief U.S. equity strategist at JPMorgan, told CNBC on Monday that stocks are positioned for as much as a 5 percent pullback.

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"In the short term, if the data is weakening — and I think investor expectations haven't really adjusted to that — there's a chance for the market to consolidate in the short term," he said in a "Squawk Box" interview. "Flat would be a good outcome. And I think [a] 5 percent drop is very possible."

Last week, the Dow industrials and gained ground every day, as both indexes climbed more than 2 percent in just five sessions.

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But Lee speculated about a "worst-case scenario" for stocks: "[It] would be that we've got a bigger hit to consumer spending than expected; there's some adverse developments in Europe; and China doesn't sort of stabilize. I think that would set us up for a larger correction."

With the first quarter winding down at the end of the month, Lee said, "We're thinking about the March to June period, you want to focus on the lag. In the first quarter, a lot of groups [were] left in the dust: Chemicals, basic materials, mining, autos, tech hardware."

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He also pointed out, "Last year … the groups that lagged in the first quarter were big outperformers in the second quarter. If we're looking at a pullback, we would want to buy the groups that didn't do well [so far in 2013]."

By CNBC's Matthew J. Belvedere; Follow him on Twitter @Matt_SquawkCNBC