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Jim Paulsen: Overvalued market has further to fall

Despite all of the market spasms amid fears of slowing global growth, stocks are on pace for a weekly gain, but that's not enough to think the worst is behind us, strategist Jim Paulsen said Friday.

"The thing that really brought this market down was basically a market that was overvalued, that developed investor sentiment that became too complacent," he told CNBC's "Squawk on the Street." "If we just go right back up to highs I don't think we've done anything."

While the major indexes are still far from their highs, a late rally Thursday took all three from correction territory. But without seeing complete capitulation and flights to gold, the dollar and quality Treasury bonds, Paulsen was hesitant to call a bottom.

"We haven't seen [that] yet," the chief investment strategist for Wells Capital Management said, adding it might take the S&P falling to 1,800 to bring about a flight to safety. "Maybe that's a sustained base that we can make a run from, so I don't think it's over."

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Jim Paulsen, Wells Capital Management's chief investment strategist
Adam Jeffery | CNBC
Jim Paulsen, Wells Capital Management's chief investment strategist

Ryan Larson of RBC Global Asset Management agreed it might be early for investors to think volatile swings were over, emphasizing the S&P' 500s 1,985 level as a crucial mark to watch. At midday Friday, it was at 1,985.

"We don't want to see this rally sustained by short covering," he told "Squawk on the Street." "You actually want to see real buying." Optimistically, Larson pointed to recoveries in consumer discretionary names, health care and technology that got hit Monday as positive signs.

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While Paulsen sensed a shift in focus from data and information to technicals and emotion, he didn't place any added importance on the fact the S&P experienced a "death cross" Friday as its 50-day moving average crossed below the 200-day moving average.

"I don't put special significance on that death cross over other ones," he said, adding the more important number to watch would be the August jobs report coming next Friday.