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Stock market rally on thin ice, odds of deep sell-off growing: Citi Private Bank

This is what could spark a deep sell-off
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Stocks facing high odds of deeper pullback: Citi Private Bank’s Bailin
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Stocks facing high odds of deeper pullback: Citi Private Bank’s Bailin
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Tuesday's stock market sell-off may be a lot more than just a blip.

Citi Private Bank's David Bailin believes a bigger pullback could be on the way — one hinging on the notion that President Donald Trump is losing political clout.

The president suffered a blow on Monday when FBI Director James Comey and NSA Director Adm. Mike Rogers discredited Trump during a congressional hearing over accusations that President Barack Obama wiretapped Trump Tower during the election.

There's concern the latest developments could create a domino effect on Capitol Hill, sidelining legislation such as tax cuts that Trump wants to pass, according to Bailin.

"We think that could have a real implication for where the market goes," the bank's global head of managed investments said Tuesday on CNBC's "Futures Now." "Yesterday, was a pretty significant torpedo in the certainty with which people have been acting."

He noted that it "potentially indicates a weakening of Trump's ability to influence the political process."

The latest challenge comes just as the House Rules Committee is scheduled to hold a hearing Wednesday on the Republican health care bill. A vote by the full House on it is expected Thursday. Trump hopes the legislation ultimately replaces the Affordable Care Act, also known as Obamacare.

Just as the drama increases on the hill, Citi Private Bank, which has $390 billion under management and caters to high net-worth clients, believes the markets are priced for protection, but it has been telling investors the odds of a major pullback are increasing.

The major indexes dropped by more than 1 percent on Tuesday, making it the worst day in more than five months. And, the Dow and broke a streak of 109 sessions without a 1 percent decline.

"The idea that we couldn't see some type of pullback in Q2 or early Q3 as you head into the summer months is kind of silly," Bailin said.

And, there's a second factor sitting high on Bailin's watch list: oil. Crude closed at $47.34 a barrel on Tuesday for its lowest settle since Nov. 29. Bailin has been viewing oil as the first wall of worry — albeit "small" — since the election.

"If we were to go back just about 45 days ago, ... oil would be trading between $50 and $60. That the trend would be higher generally over the course of the year and oil would take part in this reflation trade," he said. "We've seen the exact opposite take place."

Bailin points out that supply concerns have become dominant, saying "we've seen issues on whether or not OPEC, and specifically Saudi Arabia, can in fact curtail the supply of oil." This could bleed into the stock market in the form of downward pressure.

Despite the risks in Washington and headwinds from oil, Bailin believes there's still some opportunity to make profits in this environment. He says the key is to look outside the U.S. by focusing on the emerging markets.

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