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• The S&P 500 could tumble up to 12% in one last sharp sell-off before year-end, according to Morgan Stanley chief investment officer Mike Wilson.
• "Price action appears exhaustive and the market seems ripe for another correction," said the chief investment officer on Monday.
• Along with an exhausted vaccine-driven rally, Mnuchin's decision to allow Fed lending programs to expire adds to the risk of a near-term correction, Wilson said.
• However, the CIO still has a bullish long-term outlook. He has a year-end 2021 price target of 3,900 for the S&P 500, a 9.6% upside from current levels.
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The S&P 500 could tumble up to 12% in one final correction before the end of the year, according to Morgan Stanley's Mike Wilson.

Recent stock weakness could be the beginning of "one more twist" for stocks as the vaccine-driven rally is exhausted, wrote the chief investment officer in a note to clients.

"Most noticeable to us last week is the almost universally bullish view from investors, including retail. In fact, it's very hard to find a bear on 2021 — a dramatic shift from even 3 months ago," he wrote. "However, price action appears exhaustive and the market seems ripe for another correction."

Wilson acknowledged that while many investors expect choppiness heading into next year, they may be underestimating the potential for a larger correction.

"Given the events last Thursday and extreme positioning, we think the downside could be greater and even return to the lower end of our long standing trading range (3150-3550) one more time," he said.

Read more: Goldman Sachs says to buy these 26 stocks poised to deliver the strongest earnings growth in 2021 as the S&P 500 surges another 20%

Besides a rally that appear to be getting exhausted, another risk for stocks in the near-term is "quasi tightening," according to Wilson. This follows Treasury Secretary Steven Mnuchin's decision to allow several emergency Fed lending programs to expire, while simulateously requesting that the central bank return more than $70 billion in unused funds that Wilson says would have supported credit markets.

"Mnuchin's unexpected request to the Fed to return funds amounts to a quasi tightening at the time of the year when liquidity needs are rising," he said. "With equity markets back to resistance, another correction has likely begun with a classic sell the news reaction to the vaccines."

Wilson told investors to buy cyclical stocks pegged to the economy that may be oversold in the event of a correction. This dip-buying suggestion reflects his longer-term bullishness. He holds a year-end 2021 price target of 3,900 for the S&P 500, a 9.6% upside from current levels. On November 17, Wilson said the stock market is vulnerable to several drawdowns before an "unequivocally bullish 2021."

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