Market surge off low is getting tapped out, Bryn Mawr's Jeff Mills warns

The market rally off the March 23 low may be losing steam.

According to Bryn Mawr Trust's Jeffrey Mills, there's not enough juice left to drive another surge despite the Federal Reserve's aggressive actions to keep the financial markets functioning.

"The liquidity injection that the Fed is introducing to the market is actually being tapered off," the firm's chief investment officer told CNBC's "Trading Nation" on Friday. 

Without another burst of Fed stimulus, Mills is concerned the recent rally is on borrowed time.

"The stock market has already discounted a significant degree of the economic recovery. So, incrementally improving data here might not do much to lift prices," he said. "The risk reward isn't great here." 

Mills, a CNBC contributor, highlights S&P 500 performance and earnings per share estimates as evidence of a growing disconnect between the market and economy. 

Over the past few months, they've been moving in opposite directions. Typically, the track together.

Mills warns it's an ominous signal for the market. 

"Stocks are discounting an environment that is not necessarily reflective of not only economic fundamentals, but earnings fundamentals," said Mills, who has $16 billion in assets under management.

He worries runaway valuations could be the rally's undoing.

"Assuming that we maintain current levels around 3,100, that's 26 times trailing p/e [price to earnings] multiples at the end of the year," he noted. "For context, that's the highest multiple that we've seen since the tech bubble."

In mid-April, he cut his exposure to stocks. Mills remains slightly underweight, but he has been tilting his exposure to more economically sensitive stocks. 

"If the market does continue to move higher, even if fundamentals don't support that, what we've seen is those beaten down, lower valuation small and mid-cap and value stocks do well. So, that should be a tailwind for our positioning," he said. "If things get dicey again, at least we have that underweight hedge to protect us on downside."

Mills believes the biggest mistake an investor can make is being too optimistic or too pessimistic in this environment.

"You have information that's all over the map. Sentiment data isn't really clear. One day you get a positive virus headline. The next day you get a negative one," Mills said. "Positioning needs to be somewhat nuanced."

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