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'Nasty' 10-20% Pullback Possible This Fall: Strategist

The stock market rally will continue—but beware of a pullback, said Jeff Krumpelman of Hilliard Lyons Capital Management and Christopher Zook at CAZ Investments.

“We’re going to continue to see a little bit of a life,” Zook told CNBC. “We’re going to go back and test those highs that we saw a couple of days ago.”

But if stocks don’t break to the new highs and markets pull back below Tuesday’s lows, Zook told investors to brace for a “pretty nasty correction” of about 10 to 20 percent early this fall.

However, he added, “short-term, the momentum is still on the upside.” 

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Zook said investors can protect their portfolios by looking into select areas of financials and health insurance.

“There is a trade in the health insurance companies but you have to be very selective,” said Zook.

“The health care reform is going to be milder than people expected. And therefore, when you get the final news, people can price that into the valuations—you’re going to get a lift in these stocks because it’s not going to be as bad as people were afraid of.”

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In the meantime, Krumpelman said the market rally is still in gear, based on fundamentals, valuation and technicals.

“We like what we see in terms of breadth and we should expect some correction after you have a 38 percent retracement that everyone’s talking about,” he said.

“That’s normal, but there’s a ton of cash on sidelines and I think if everyone was in, we’d be nervous, but everyone’s not in—so we feel pretty good about a cyclical recovery in the market.”

In addition to technology, industrials, materials and energy stocks, Krumpelman recommended the consumer discretionarysector.

“Add some beta and cyclicality into the portfolio,” he told investors.

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No immediate information was available for Krumpelman or Zook.

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