Market rally could be ‘bull trap’, trader warns

Market rally could be 'bull trap', trader warns

Investor warns latest market return could be a “bull trap.”

Key averages erased their week’s losses on Thursday as concerns about the China Evergrande debt crisis eased and investors urged the Federal Reserve to hold the stimulus for now.

But investors shouldn’t be too comfortable just yet, Quint Tatro, chief investment officer at Juul Financial, told CNBC’s “Trading Nation” on Thursday.

“We are starting to worry about the complacency that we are seeing among traders,” Tatro said. He said his company recently reduced its exposure to equities “for the first time in a long time.”

“We… are more and more concerned about the perennial idea that we are always going to bail out,” he said. “We think we might see some more downside momentum here, and we’re not thrilled with this latest snapback rally. We think this could be a bit of a bull trap, and we’re going to stop our pass a bit higher than in the past.

While the rise has been remarkable, that doesn’t mean stocks have come out of the woods, said Katie Stockton, managing partner and founder of Fairlead Strategies, in the same interview.

“The pullback that preceded it resulted in short-term breaks in major indices” and individual stocks, she said. “This reflects a loss of market scope which is somewhat related to the suggestion that with these weak seasonal effects in hand the market is likely in store for further consolidation.”

Stockton said there may not be a significant downside risk, but with the latest sell-off on mid-term momentum there will likely be some headwinds for the stock.

“We are starting to see sell signals on the weekly chart giving us pause to use this rally of relief to add risk,” he added. “We would like to use it to hedge the risk of stocks that have erupted.”

Both traders agreed that some commodities looked attractive, with Tatro in the materials sector and Stockton in energy.

“We’re willing to try to look at these oversold opportunities in relative terms, and that includes the energy sector,” Stockton said. “Not only have we seen medium-term oversold readings following a corrective phase, but now we’re starting to see them in terms of momentum. Many energy stocks are erasing their 50-day moving averages.

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