It feels like someone screamed 'fire': Tom Lee

The third quarter has come to a close, and the scoreboard for the year isn't pretty. The S&P 500, Dow and Nasdaq composite index have dropped roughly 7 percent, and many former market leaders including health care and large-cap tech have seemingly fallen off a cliff. But one top strategist says that because expectations are so low going into the home stretch, there may be nowhere to go but up.

"It feels like someone called fire in a crowded theater," Fundstrat Global Advisors co-founder Tom Lee wrote in a research note this week. "We find clients more scared than any time since 2009."

On CNBC's "Fast Money" on Wednesday, Lee laid out 3 key reasons why dismal sentiment may actually be an indicator that stocks could be headed higher.

First, Lee addressed the Street's "grim expectations" for third quarter earnings. "A lot of times how markets react to earnings has to do with expectations," Lee said, adding that this time around, "people are expecting a horror show."

According to Lee, future earnings could actually get a boost from a U.S. dollar that's taken a pause from its rapid ascension. "The dollar isn't as strong as it was earlier this year, so it's going to start to become a tailwind," he said.

Lee was less bullish on China, conceding that there is still a large amount of uncertainty surrounding the world's second largest economy. But according to Lee, weakness in China does not necessarily translate to weakness in stocks on the home front.

"In 1989, Japan was a bigger share of global GDP than China is today," he said, "and the downturn in Japan did not spill over into the U.S."

Finally, Lee said the out-performance of the S&P 500 versus the rest of the world, coupled with a seasonally strong period for stocks, could help the index reach his target level of 2,325 by the end of the year.

"Whenever you have a down Q3, Q4 is up 90 percent of the time," he said. "If there is a global downturn, people are going to migrate to the quality market. Since 2009, that's been the S&P. So I think the S&P is actually going to be a recipient of capital."