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I see lower lows, but would buy dips: Jim Paulsen

Closely watched market strategist Jim Paulsen said Monday he's more optimistic on stocks, but wary about whether the market has bottomed.

"My guess is we're going to break back down again yet; and break 1,800 [on the S&P 500], get everyone convinced we're headed for recession, scare everyone it's a bear market," the chief investment strategist at Wells Capital Management told CNBC's "Squawk Box."

"I don't think we'll go a lot lower than that. We'll be at 16 times trailing earnings at around that level," he continued. "I think that's a very sustainable multiple, even if we're facing higher interest rates [from the Fed] over the next couple of years."

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Wall Street last week logged its first weekly gain of 2016. But the dismal start to the year still had the Dow Jones industrial average, the S&P 500 and the Nasdaq composite in a correction, down at least 10 percent from record highs, ahead of Monday's trading. The S&P 500 closed Friday at 1,906.

"The upside potential even to get back to flat this year is starting to be in-line or maybe a little better than the downside risk from here," Paulsen said, advising investors to buy on dips below 1,900 on the S&P 500, which along with the Dow, was down around 7 percent year to date. The Nasdaq was down 8 percent in 2016.

"[The] market is finding a new valuation level to deal with full employment" and the negative consequences that follow such as higher rates from the Federal Reserve, Paulsen said.

But he argued: "The entire leadership of the bull is changing here as we go forward here," with industrials looking better than consumer-driven companies, small caps possibly performing better than large-cap stocks, and international markets poised to outperform U.S. stocks.

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