Latest Comeback by Markets Could Be "Bull Trap" | ETF Trends

With the crisis surrounding China’s Evergrande seeming to have abated for the time being and the Federal Reserve opting to keep the stimulus in place until employment and inflation numbers improve further, sinking markets made up their losses on Thursday. Some investors and strategists are warning that the bounce-back could be too good to be true, though, reports CNBC.

Quint Tatro, CIO of Joule Financial, believes that there is a complacency amongst traders now after having relied on Fed intervention for so long.

“We’re … getting concerned with this perpetual idea that we’re always going to be bailed out,” Tatro said. “We do think we could see some further downward momentum here, and we’re not getting all excited in this latest snapback rally. We think it could be a little bit of a bull trap.”

Fairlead Strategies managing partner and founder Katie Stockton acknowledges the strength of the bounce-back but also says that the pullback it is recovering from could be indicative of a weakening within aspects of the markets. While Stockton doesn’t anticipate a big downside risk, this most recent downturn indicates the potential of slowing momentum in the intermediate.

“The pullback that preceded it (the bounce back) did yield short-term breakdowns in the major indices” and individual stocks, Stockton said. “That shows a loss of market breadth that is somewhat concerning suggesting that with these weak seasonal influences at hand, the market probably is in store for additional consolidation here.”

CFA Offers Volatility Weighting

For cautious investors that are looking to invest in large-cap stocks that continue to perform but keep an eye on volatile markets, the VictoryShares US 500 Volatility Wtd ETF (CFA) is a solid option. The fund allows investors to gain balanced exposure to large-cap U.S. equities with a unique volatility-weighted approach.

CFA tracks the Nasdaq Victory US Large Cap 500 Volatility Weighted Index. The benchmark screens all publicly traded U.S. stocks and only includes those with positive earnings in the most recent four quarters.

From there, the benchmark takes the top 500 stocks by market cap and weights them based on the volatility of their price changes over the previous 180 days. Those with lowest volatility get the highest weighting, while those with highest volatility have the lowest weighting.

CFA’s sector breakdown as of the end of August includes a 17.43% allocation to industrials, 16.21% to financials, a 16.15% allocation to information technology, 14.66% to healthcare, 9.96% in consumer discretionary, and various smaller allocations.

The fund has an expense ratio of 0.35%.

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