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Look out below—where stocks could bottom: Paulsen

Stocks appear vulnerable to test and maybe even break the lows seen toward the end of August, closely followed market watcher Jim Paulsen said Tuesday, as the Dow Jones industrial average plunged about 200 points on the open.

"I think at a minimum we go challenge the old lows we had set on the initial crash," the chief investment strategist at Wells Capital Management told CNBC, referring to Aug. 25 when the Dow sunk to 15,666 and the S&P 500 fell to 1,867.

"My best guess is we break those maybe and head down towards 1,800-ish [on the S&P] or that level before we finally scare everyone entirely, and maybe finally find a bottom in this correction," Paulsen said on "Squawk Box." The S&P at 1,800 would represent a nearly 8.5 percent drop from where the index closed Monday at 1,966.

"The things we're going to have to face going forward now that we're at full employment, and have interest-rate and maybe inflation pressures, I think we're going to need a lower valuation and a more cautious sentiment among investors," he continued. "I'm not sure we're there yet."

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Reacting to the Federal Reserve's decision last Thursday not to hike interest rates for the first time in nine years, Paulsen said he wished the central bank made a move.

Based on the Fed's dual mandate of fostering employment and keeping inflation in check, he sees price pressures building and a solid job market. "I just don't get excess labor slack argument."

But bowing to reality, Paulsen said he thinks Fed policymakers are going to "wait until there's a panic exit, when they're forced to exit."

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