Is a 10% Pullback Coming? I’m Preparing

Despite persistent risks hanging over the global economy — inflation, geopolitical tensions, U.S. stocks continue to defy gravity. Major indices have recently hit record highs.

S&P 500 (.SPX)

But should investors start getting cautious?

Historically, the late summer months tend to be weaker for the market. And when the market has already enjoyed strong gains from May through July (as it has this year), it’s not unusual to see a pullback. Call it a seasonal correction or just a breather, but history suggests the party doesn’t always last uninterrupted.

A Market That's Been Running Hot

Personally, I’ve been watching the market rally with a healthy mix of admiration and caution. There’s no denying the strength behind the recent surge, but markets move in cycles and after extended bullish runs, there are often moments of reckoning. I’m not forecasting a crash, but I do think a moderate pullback is very possible in the near term.

That’s why I’m focusing less on chasing momentum trades and more on long-term resilience. My current approach is simple: only buy stocks I’d be comfortable holding through a downturn, and make sure they’re backed by solid fundamentals.

One Stock I Like: Wendy’s (WEN)

One of the names I’ve recently added and feel comfortable about holding for the short/long run is Wendy’s (WEN). On the surface, it may just seem like another fast-food stock, but there are a few compelling reasons it stands out to me right now.

Wendy's (WEN)

First, there’s a smart bit of marketing synergy in play. Wendy’s recently announced a creative partnership with Netflix’s Wednesday, titled the “Meal of Misfortune.” The meal will be available starting Monday, August 4 in the U.S., aligning perfectly with the premiere of Wednesday Season 2, Part 1. In Canada, the meal drops on Monday, August 11. For fans of the show, this is a brilliant way to turn screen time into foot traffic.

I believe cross-promotional efforts like this can have real commercial impact. While it's not going to transform the company overnight, it’s the kind of buzz that boosts brand relevance and potentially drives a measurable spike in sales, especially with younger demographics.

But it’s not just about quirky marketing stunts. Wendy’s financials look solid and its dividend yield is attractive. Relative to its price, I see value. That’s the kind of stock I want to be holding if and when the broader market stumbles.

So... How to Hedge a Potential Pullback?

There are a couple of ways investors often hedge during times of potential volatility:

1. VIX Calls or VIX ETFs – The VIX (Volatility Index), often called the “fear gauge,” tends to spike when markets fall. Buying call options on the VIX, or holding inverse ETFs like VIXY, can be a short-term hedge against market declines.

   But here’s the risk: These are short-term tools. VIX ETFs lose value quickly when markets stay calm due to contango (a fancy way of saying they decay over time). Hold them too long, and you might lose money. The timing has to be very precise and that’s tough to get right.

2. Put Options on Broad Indexes – Buying puts on the S&P 500 (SPY) or Nasdaq (QQQ) can provide direct protection. These options rise in value when the market falls, although they come at a cost, and timing matters.

   But the downside? If the market doesn’t drop by the time the put expires, you lose the premium. It’s easy to waste money chasing a correction that never comes. Timing is everything, and that makes it tricky unless you’re actively monitoring the trade.

3. Raising Cash or Rotating into Defensive Stocks – If options feel too complex, simply trimming positions, raising some cash, or reallocating to more defensive sectors like utilities, healthcare, or consumer staples can help soften the blow of a correction.

   But the trade-off: If the market keeps rallying, holding cash means underperformance. And some defensive names can lag badly during bull markets.

The Bottom Line

Markets don’t go straight up forever. Even in bull markets, pullbacks are healthy and expected. While it’s impossible to time the exact top, it is possible to prepare.