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Experts warn on momentum trade: When it doesn't work, 'it gets ugly'

  • The rotation out of tech stocks on Wednesday isn't necessarily the start of a trend yet, but investors need to be cautious, two experts warned.
  • The Nasdaq sank 1.3 percent on Wednesday, while the Dow Jones industrial average closed at an all-time high.
  • "Momentum works and works and works until it doesn't. And when it doesn't, it gets ugly," Ariel Investments' Charlie Bobrinskoy said.

The rotation out of tech stocks on Wednesday isn't necessarily the start of a trend yet, but investors need to be cautious, two experts warned.

The Nasdaq dropped 1.3 percent on Wednesday, while the Dow Jones industrial average closed at an all-time high. Shares of Facebook, Netflix and Alphabet all fell. Financials, on the other hand, rallied.

"We have had really crowded trades with the fast money all piling into these high-PE, high-tech names and shorting the value stocks," said Charlie Bobrinskoy, vice chair and head of investment group at Ariel Investments.

"Momentum works and works and works until it doesn't. And when it doesn't, it gets ugly," he added.

Bobrinskoy told CNBC's "Closing Bell" that value stocks did well on Wednesday because they will benefit more from tax cuts. And he now sees the probability of a tax deal getting done at 75 percent or 80 percent.

On Tuesday, the Senate Budget Committee approved its tax plan, sending it to the chamber for a full vote.

Michael Yoshikami, founder and CEO of Destination Wealth Management, said it is natural for profit-taking in tech, since it has seen an "incredible rally."

He called Wednesday's action "just rotation" and not necessarily the beginning of a trend. However, he thinks a trend rotation is "inevitable" since tax cuts will benefit those stocks that have more earning relative to their value.

"Everyone loves their Amazon stock and their Tesla stock and all the other names that have rallied strongly," Yoshikami said in an interview with "Closing Bell."

However, he echoed Bobrinskoy's comments.

"Momentum works until it doesn't. And when it doesn't work, if the fundamentals aren't there, it can get very scary. So you have to be cautious with these types of names," he said.

Noted tech observer Gene Munster, managing partner at Loop Ventures and a former analyst at Piper Jaffray, also believes the pullback in tech is understandable since it's had such a big run.

However, he isn't concerned.

"I don't think it changes some of the fundamental opportunities around some of these big names," Munster said in an interview with "Power Lunch."

— CNBC's Fred Imbert contributed to this report.

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