Stocks will pull back into February, says BTIG. Here's where to hide out

Equity markets bounced back Wednesday after a wild ride in the previous session, and one top technical strategist sees a more pronounced decline ahead as we near the latter half of the month.

The S&P 500 will likely see a loss of momentum in the coming sessions with a potential 4 to 5 percent pullback into February, wrote Katie Stockton, chief technical strategist at BTIG, in a new note.

"This would be a welcome development because it would alleviate the market of overly bullish sentiment without likely taking a toll on positive long-term momentum," Stockton wrote.

While her firm continues to support a bullish bias in the market as long as momentum is strong, Stockton said she would consider managing any risk by reducing exposure to stocks that have signs of "upside exhaustion" and adding to positions in names carrying positive technical catalysts like perceived breakouts.

"The longer it takes for a pullback to develop, in fact the less dramatic it should be. But even still, a 4 to 5 percent pullback would certainly shake the market," Stockton said Tuesday on CNBC's "Trading Nation."

She would look to two reliably so-called safe havens in the market if a pullback were to hit stocks.

"If you're looking for relative performance during a pullback in the S&P 500, you can typically find it in the more defensive sectors of the market, and those tend to also be the interest rate-sensitive sectors that have underperformed recently with the backup in Treasury yields," Stockton said.

This would include real estate investment trusts, consumer staples, telecom and utilities. She would look to utilities and the utilities-tracking XLU ETF specifically, because the sector's underperformance has been quite pronounced, to the point of an oversold condition.

Another safety play Stockton recommends is the gold miners.

"Gold from a long-term perspective has been sort of sleepy, but recently has picked up momentum," she said, pointing to a chart of the VanEck Vectors gold miners ETF, the GDX.

"If we did see a breakout in gold prices with more defensive positioning, it does tend to be looked at as a safe haven at times," Stockton said.

The XLU was modestly higher Wednesday, while the GDX was barely positive.


Trades to Watch

Trader Bios


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

Read more