Fade the emerging market rally: Traders

Investors seemed to have put renewed faith in emerging markets over the past few weeks, with the emerging market ETF (EEM) rising more than 7 percent and outperforming major U.S. indexes. But despite strong gains, traders say that the latest emerging market bounce is not to be trusted.

Emerging markets have been badly beaten as commodities prices have fallen to multiyear lows. Kathy Lien of BK Asset Management said Tuesday's 3 percent rise in emerging markets was spurred by optimism around China, one of the world's largest consumers of commodities.

"The only reason why these emerging market nations' stocks are rising is because China's pressing the pedal to the metal with their latest reduction in the reserves that banks need to hold," Lien said Tuesday on CNBC's "Power Lunch."

China's cut in required reserves, which is meant to increase loans and assist economic growth, will not be enough to bolster its slowing economy, she said. Lien also foresees more outflows from China, which will further weaken the yuan and the country's purchasing power. This would weigh even more on emerging markets that look to China as a key consumer and trade partner.

And while the increased liquidity in banks may help boost the stock market, Lien said it isn't enough to encourage a substantial recovery for China or other emerging markets.

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"Based upon the previous moves of this similar nature that they've taken, it has not effectively increased new investment or economic activity," Lien said. "I think the Chinese government is going to need to do more."

Along with news out of China, the bounce in oil has helped emerging markets, said Gina Sanchez of Chantico Global. However, "neither of those are actually good enough reasons to dive into emerging markets right now. They are falling knives," she said Tuesday on "Power Lunch."

Recent talk of a production cut or freeze from OPEC has driven oil's gains in the last month. But Sanchez said it's unlikely that higher crude prices will help emerging markets in the near term. The price of oil "might start to rise, but it's going to rise slowly and I think that story's going to take a long time to bear out," she said.

Still, the story may not be all bad for emerging markets. In a Tuesday note, Kevin Caron and Chad Morganlander of Stifel wrote that emerging markets have been brought up to a neutral weighting as valuations compared to the S&P 500 start to look more attractive.

"While there may still be some turbulence yet ahead, the reset in expectations and valuations warrants at least a small allocation for investors with a longer-term point of view," the Stifel note said.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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