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Be prepared for a market pullback, Needham fund manager warns

Look for opportunities in small caps: Pro

Markets have recovered nicely following Britain's vote to leave the European Union, but investors should be prepared for a potential wave of selling, Needham Growth Fund Portfolio Manager Chris Retzler said Friday.

Retzler made his comments one day after U.S. stock markets took a pause, with the Dow Jones industrial average snapping a nine-day winning streak.

"Markets aren't just going to go to the sky. They do correct," he told CNBC's "Squawk Box."

"We do still see a positive return going forward in the year. It wouldn't surprise us if there's some profit-taking in the markets," he said.

Stocks have been climbing a wall of worry, with equities rising as investors cover their short positions, he said. And while earnings season has been moderately better thus far, Retzler cautioned that the performance comes against a backdrop of lowered expectations.

Asked whether the rally had plateaued, Retzler said he instead views the market moves as a sign of sector rotation. Investors cannot expect the broad gains that came during the Federal Reserve's , he added.

Despite preaching caution, Retzler said the market has room to run. While the and Dow have set new records in recent weeks, the small-cap index has yet to hit new all-time highs, he noted.

The Russell is up about 6 percent on the year through Thursday's close.

A resurgent Russell would help validate the large-cap rally in Retzler's view. He said he's also heartened by the turnaround in high-yield debt, an active mergers and acquisitions market and a trickle of successful initial public offerings like the debut of Twilio following an IPO drought.

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