Hedge Funds

Scary! This bearish call points to 40% market drop

Spitznagel: Market is set up for huge crash

The stock market is trading at unsustainable levels that could eventually lead to a major sell-off, with a possible 40 percent drop in stock prices, hedge fund executive Mark Spitznagel told CNBC Wednesday.

"The simple answer, the mom and pop answer, I think, is just to step aside," said Spitznagel, founder of Universa Investments and an associate of "Black Swan" pioneer Nassim Taleb.

Spitznagel, incidentally, has some Street cred when it comes to predicting downturns: He called it in 2000 and 2008 and made one of the biggest profits on Wall Street during the 2008 financial crisis, while many other investors were losing money.

Appearing on "Closing Bell," Spitznagel suggested the Federal Reserve, which last month reaffirmed its policies on bond purchases and record-low interest rates, is basically propping up stocks and otherwise distorting the market.

"It's a market that is sort of set up, I think, for a major crash, a major sell-off," said Spitznagel. "I would argue all the major tops we've seen in the market over the last 100 years look very much like it does today."

(Read more: Weak jobs report signals longer Fed easing)

"The ultimate causes of crashes is the distorted environment we're in," he continued.

(Read more: Stocks are slumping—but not for reasons you think)

Spitznagel said it would be naïve to pinpoint when a selloff could occur, but guessed it could happen within the next year.

In turn, Spitznagel recommends retail investors step aside and wait for opportunities to come.

—By CNBC's Drew Sandholm. Follow him on Twitter @DrewSandholm