JPMorgan predicts short-term market pullback due to Fed rate increase, complacent hedge funds

Traders works on the floor of the New York Stock Exchange as a television screen displays coverage of U.S. Federal Reserve Chairman Janet Yellen shortly after the announcement that the U.S. Federal Reserve will hike interest rates, in New York, December 14, 2016.
Lucas Jackson | Reuters

The massive rally in the stock market since the U.S. presidential election could soon hit a wall, according to strategists at JPMorgan.

"In the near-term we see increasing risk of a sell-off due to more hawkish Fed rhetoric at a time when investor positioning is stretched and equity volatility is likely to rise from low levels," JPMorgan's U.S. equity strategist Dubravko Lakos-Bujas wrote in a note to clients Monday.

U.S. stocks are up 11 percent since the election on Nov. 8, led by financial stocks, which are up nearly 24 percent over the same period. Other cyclical sectors such as industrials, technology and materials are each up at least 11 percent.

Given the strong gains, stocks already pierced last week through the firm's year-end price target of 2,400, likely limiting the upside potential from here, at least in the short term, JPMorgan said.