Futures Now

A cruel summer for stocks is likely upon us, Federated's Phil Orlando warns

Investors should brace for 'air pocket' to hit market, Phil Orlando says

The stock market may be on the verge of an even deeper decline.

Federated Investors' Phil Orlando is out with a note suggesting a cruel summer for stocks has arrived.

"We're expecting an air pocket here that will take the market down to let's say the 200-day moving average over the summer months," the firm's chief equity strategist said Tuesday on CNBC's "Futures Now."

His latest thoughts came shortly after stocks tumbled and went negative for the year. Right now, the Dow is on a six-day losing streak, and the just saw its fourth negative session in five.

"You've got the North Korea situation. You've got what happened with the Federal Reserve and the ECB last week. You've got a number of headwinds here. So, why wouldn't investors take some profits?" asked Orlando.

But he doesn't think the air pocket will morph into a black hole for stocks. Orlando has a 3,100 year-end target on the S&P 500, about a 12 percent jump from current levels.

"We thought a 5 percent air pocket, give or take, over the next month or so made perfect sense," Orlando said. "Once we get all of the concerns about the midterm elections, the Federal Reserve, etc., behind us post-Labor Day, we're looking for a very solid, very strong fourth quarter rally into year-end."

And, he has a playbook to take advantage of a pullback ahead of that upward move. It starts with a group that has been ripping to new highs: small-cap stocks.

"We think this rally that we're seeing in the has legs," he said. "We've had a big call on small cap, and we continue to like that particularly in this environment where you have all this trade-related concern. Small cap companies typically do 80 percent or so of their business here. So, they're not as harmed."

He also wouldn't ignore large-cap value stocks such as financials, energy and industrials — groups he believes will perform well in a rising interest rate environment.