Market Rally Faces 'July Jitters': Citi Strategist Warns

Market indicators support of a continued rally into the summer, but watch out for "July Jitters or August Angst," Citigroup's chief U.S. equity strategist said Monday on CNBC.

"If you look at how investors are participating in the markets, they have been somewhat cautious," Tobias Levkovich told "Squawk on the Street."

He said he sees investors favoring dividend stocks, defensive names and U.S. oriented companies while holding larger cash positions compared with a year ago. As a result, he said, investors likely haven't truly bought into the rally. "It just does not show that people have embraced it."

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"In our view, we're far from frothy. We're very neutral on our sentiment metrics," Levkovich said. "We think markets can rally 100 points on the S&P 500 between now and the summer. We've said don't sell in May, but worry about July Jitters or August Angst." The reason? Europe and uncertainty from the U.S. government potentially posing problems for a continued rally.

"A lot of investors are concerned about growth, about margins, not to mention a heightened sense of insecurity after (the events in Boston)," he said.

Although the year started off with strong year-over-year earnings growth, expectations have been trimmed for many corporations and "a majority of companies are beating these expectations, so I tend to be a little bit skeptical about some of the talk. I'd rather see what people are doing with their money."

Based upon credit conditions and other lead indicators, Levkovich said he's "a lot more" worried about Europe than China, despite a 10 percent correction in the world's second largest economy over the past two months. However, in the United States, conditions have been improving, he said, pointing to growing revenues and higher earnings for U.S. companies in coming quarters.

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"For the most part, these credit conditions lead S&P 500 revenues by a full 12 months," he said, noting a positive turn in U.S. credit conditions into the first quarter. From his view, this supports revenue increases for U.S. companies into the second half of this year.

In the markets now, Levkovich sees some consumer discretionary stocks as "pretty stretched" while some consumer staples stocks "look very expensive." However, he said he doesn't see a reason to worry about the consumer, with tax refunds on the way and credit conditions that support employment.

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Levkovich added that his team is still "worried about materials," since the U.S. materials sector is more heavily weighted toward chemicals and weakness in Europe will pinch in this key area. "Europe is a big problem for chemical companies. The problem is that 20 to 25 percent of their business is coming from an area that is going to be very disappointing," he said.

— By CNBC's Paul Toscano. Follow him on Twitter and get the latest stories from "Squawk on the Street" @ToscanoPaul