Investor Jeffrey Mills warns stocks are in a red zone.
According to the Bryn Mawr Trust chief investment officer, the market is particularly vulnerable to a 10% pullback due to elevated headline risks coupled with high valuations.
"I don't think we fully understand the scope of what's going on with the coronavirus," he told CNBC's "Trading Nation" on Tuesday. "I wouldn't be surprised to see additional headlines come out that might shake the markets a bit."
Yet it appears Wall Street optimism is returning. The market staged a major rebound on Tuesday, with the Dow snapping a five-day losing streak and the S&P 500 seeing its best one-day performance since October.
But Mills, a CNBC contributor, isn't abandoning his pullback forecast.
"I wouldn't give the all-clear sign just yet," he said. "The problem is in the very near term, what's transpired over the last couple of days has not been enough to get rid of some of the overbought signals just from a technical perspective."
In just the past 12 weeks, the S&P 500 and Dow are up 8% and 6%, respectively. It's a sharp move that leaves the market open to pain.
"I think every single year the average peak-to-trough drawdown is somewhere around 12%," he said. "Whether it's the coronavirus or some other catalyst, I would not be surprised to see that transpire."
But he's not turning bearish.
"This is all happening within the confines of an ongoing economic expansion and an ongoing bull market," he noted.
Mills expects near-term volatility will give investors a key entry point to pick up stock bargains.
"A 5% to 10% drawdown would bring us right around the upward sloping 200-day moving average [for the S&P 500] around 3,000," he said. "In that case, we would be buyers."
Mills lists financials, homebuilders and semiconductors as his top picks.
