The market is 'vulnerable,' but here are 3 things that could signal the next rally

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Market's vulnerable, here's what I'm watching for a turnaround

The market is "vulnerable," but three things could signal the next rally, according to one strategist.

Ed Clissold, Ned Davis Research's chief U.S. strategist, said investment sentiment, particularly signs of pessimism, is the "number one thing you want to look for."

"We'd like to see a little bit of a washout, and some of that just takes a little bit of time for people to digest information and to get a little more cautious," he told CNBC's "Futures Now" on Tuesday.

Secondly, Clissold monitors how oversold the market gets. While Monday's sell-off took the Dow down over 750 points, the strategist says even more extreme oversold conditions could put the market back on track, especially given that stocks had looked overbought in the last few months. In other words, stocks aren't at the "washout level" that Clissold is looking for, but once the market becomes oversold, it could be a sign of an imminent rebound.

Finally, Clissold points out that earnings estimates for the fourth quarter are still pretty high, perhaps a little too high.

"We'd like to see those estimates get lower before we'd feel comfortable that there's a little bit of a better fundamental underpinning to the market," he said.

The strategist, however, encourages investors to "partially stay" in the market, especially given that he still expects rate cuts from the Fed despite a nonrecessionary environment. That's a set of circumstances that Clissold said historically has pointed to more gains for the market.

Clissold's price target for the S&P 500 is 2,950 at the end of the year. It was down 1% at 2,843 shortly before Wednesday's opening bell.

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