How to prepare your portfolio for the next market pullback

The Street

While stocks are near all-time highs, technicals suggest a pullback could be near.

Transcript

00:00I am joined by Bob Lang, a contributor at The Street Pro.

00:04Bob, thanks so much for joining me here at the desk.

00:06It's great to be with you, Caroline.

00:07So I want to get your market views.

00:09Market up against some trade developments right now.

00:1225% tariff on Japanese goods, Korean goods.

00:15The July deadline is now August 1st.

00:19Some near-term pressure, but overall the market's been doing a good job of shrugging off a lot of the trade uncertainty.

00:26How big of a risk are tariffs right now?

00:29Well, I think if you go back to April 2nd, Liberation Day, Caroline,

00:32and you realize that the market has been reacting with a snap on every news piece that's been coming out,

00:39whether it's new tariffs coming out, whether it's a push-out for 30 days or 90 days or whatever the case may be.

00:46And the markets have been responding to that news in kind, either positively or negatively.

00:52And as that has been happening, we've seen the volatility index dropping sharply each and every day.

01:00And it's right back to where it was, Caroline, back in the late part of March.

01:03And as you recall back on Liberation Day, the volatility index rose all the way up to 60%,

01:09which is actually on record the third highest it's been around.

01:14So you go back to 2009 when it was hit about 90%.

01:18And then actually, if you go back to COVID, it was actually a bit higher than that, about 92%.

01:22So these were some pretty elevated levels.

01:25And when we see volatility rising like that, we see market players starting to sell that volatility.

01:31What they're doing is basically selling the news and saying that, you know,

01:34the news, every time it hits, is not quite as violent as it was the first time around.

01:40Let's call it like an earthquake with a whole bunch of aftershocks right after it.

01:43But I think going forward right now, I think what's dangerous right now is that volatility has come down so far

01:49that people have become very complacent about news.

01:52And we really don't know exactly how trade policy is going to work out.

01:58We've seen news coming out every single day, new stuff coming out, deadlines being extended, that sort of thing.

02:05But we really don't know how things are going to unfold over a long period of time.

02:09And that has me a little bit worried.

02:10So a VIX at 18 means that investors are too calm right now, would you say?

02:16Well, yeah.

02:17The rule of 16 here says that the volatility index is telling you that the market says

02:22it's going to be rising at about 1% over the next 30 days.

02:27That's not very much, right?

02:28But, you know, we have a lot of volatility in between.

02:31It could go up a lot, could go down a lot.

02:33But the market is telling you that the fear is just not there about something happening.

02:39And really, frankly, you know, we all know tariffs are going to hit eventually at some point in time.

02:45But is it going to hit in a way that is going to be destructive to earnings?

02:50And that's really a question that investors have right now.

02:52We'll get into the charts because I know you look at the technicals.

02:56But when you think about the fundamental picture,

02:58do you think it's easier to find cracks in the rally or easy or to find reasons of strength?

03:04Well, certainly the last six weeks or so, Caroline, we've seen the markets rally sharply up to new all-time highs.

03:11And, frankly, great months of May and June back-to-back tells us that, you know,

03:17there's a lot of momentum coming into the markets into the summertime.

03:20And July being one of the best months of the year performance-wise for the bulls,

03:25it's a great setup for more upside going forward.

03:30However, I would tell you that moving into all-time highs before we've had any results there

03:36is also a great setup for a sell-the-news sort of event.

03:40What does that mean?

03:41Basically selling the news after companies come out with some good earnings

03:45and stocks have run up 50%, 70%.

03:47Look at names like Meta and Microsoft, a couple of names that we hold in the StreetPro portfolio.

03:53These names have gone up quite significantly over the last six weeks.

03:56And certainly, who could blame an investor for wanting to take some profits after the earnings come out?

04:02So as you think about earnings season, which is approaching,

04:04do you think that will ultimately be a positive or negative catalyst for the market?

04:08Or could it be the sell-the-news event that you're talking about?

04:12Well, I certainly think that the sell-the-news event is quite possible and probable it's going to be happening.

04:19But what we've been experiencing over the past two and a half months is the dip buyers stepping in.

04:24So every time the markets come down or any stock comes down,

04:27we've seen dip buyers stepping in there and picking up the pieces

04:30when scared or nervous investors sell their stocks.

04:34So I think that that opportunity is right there for dip buyers to step in there

04:39and buy some stocks if they do get shot down after earnings.

04:42So talk to us about the levels that you're watching.

04:45And if we do see that dip, how big of a dip are we talking about to be able to get in?

04:49Well, obviously, round number 6,000 is a good number to take a look at for the S&P 500.

04:53NASDAQ, about 22,000.

04:55And that would roughly be about maybe about 1.5% down lower from where we're at right now.

05:01Even further support down to about 5,800, which would probably be about 3%, 3.5% down,

05:08would feel really painful if it happened.

05:10But still, the uptrend would still be intact even if we came down to those levels.

05:14So ultimately, even though you might be expecting a pullback here or there,

05:19it sounds like you're ultimately pretty bullish on this market.

05:22You think that any dip would be a buying opportunity?

05:25Absolutely.

05:25I think that the market is not giving you any excuses right here to be bearish right now.

05:30And I think as the opposite of bearish is bullish,

05:35you have to take one side or the other at this point in time.

05:38And I think being bullish when the market has a lot of momentum,

05:41making higher highs, higher lows, which is our textbook definition of an uptrend,

05:45you've got to go with that and go with the momentum until it's not there anymore.

05:48What would make you change your mind about that?

05:50Well, certainly some news that would shock the markets.

05:54I mean, I think that that news that we had on April 2nd,

05:56which was Liberation Day, was certainly shocking.

05:58And the markets came down quite significantly and followed through to the downside.

06:02So a big reversal like that, something like that happening,

06:06if the Fed took some crazy pills and started raising our interest rates,

06:12I don't see that happening.

06:13I know the probability of that is very, very low, if not zero.

06:16But who knows what could happen, right?

06:18If inflation doesn't go away, we see job market continues to stay strong.

06:23But the economy starts to slow down.

06:25And all of a sudden, people are starting to talk about the S word,

06:28which is stagflation again.

06:30So a lot of the different things, variables are out there in place.

06:33But for the most part, I think the market structure is pretty strong.

06:36And I think we have some upside here into the end of 2025.

06:39What could traders or investors do, though, to maybe protect their portfolios

06:46for those downturns that we could potentially see?

06:49Huge option trader, Caroline.

06:52And I love to buy puts.

06:53I love to put options are great, especially right now when volatility is so low.

06:57Let's remember something.

06:58When the VIX is down, that means it's pricing options very cheaply right now.

07:03Not just call options, but put options.

07:05So it tells you that buying a put option is cheap insurance

07:10just in case something happens and the markets happen to go down,

07:14have to drift down.

07:15I mean, we can't go up every single day.

07:17And I think the markets were up towards the end of June

07:20into the beginning of July, about six or seven days in a row.

07:23That streak can't continue, right?

07:24And so you need to have some protection on the downside

07:30just in case sellers decide to hit that sell button.

07:34Okay. We'll leave it there.

07:36Bob, thanks so much for joining us.

07:37Really appreciate your insights.

07:38Great to be with you, Caroline.

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