Hedge funds are taking money out of the market—and that's a good sign, Fundstrat founder Tom Lee told CNBC on Tuesday.
"It's bullish in the sense that markets are capable of rising while a very large player in the marketplace is de-risking, and that is going ot provide fuel later as they sort of re-risk and add buying power to the rally," he said in a "Squawk on the Street" interview.
Fundstrat reported that hedge funds are pulling money out of equities based on anecdotal evidence and moves in the hedge fund tracking beta to the S&P 500, which has declined to the lowest levels in roughly six months, Lee said.
The firms are de-risking on the chance of an "idosyncratic event," such as a Greek exit from the euro zone, a deflation surprise somewhere in the world, or an incident tied to geopolitical risk, Lee explained. The belief is that such an event could cause a correction.
However, Lee said he would buy into a dip because he believes Europe is prepared for a "Grexit" and its central banks are about to engage in bond buying, reducing the risk of deflation. He also said geopolitical risks never have long-lasting effects on markets.
The players buying equity positions as hedge funds sell have been spurred by normalizing interest rates, falling oil prices and a recent rebound in the high-yield market, he said.
"I think there's a story about capacity utilization tightening, as well. That's going to give us a better signal about U.S. fundamentals. Then we'll see the hedge funds come back into the market," he said.