'Gut-check correction' is coming, but it'll be a 'whale of a buying opportunity,' says long-time bull Jim Paulsen

It's a win streak that hasn't been seen since Dwight Eisenhower was in the White House and Billboard's top song of the year was "The Battle of New Orleans."

Fast forward about 60 years later, and the S&P 500 is setting itself up to potentially do it again. Ten-straight months of gains — unless long-time bull Jim Paulsen's "gut-check correction" forecast grips the market before then.

"There is a breakout of optimism among corporations, among consumers and among investors," Paulsen said Monday on CNBC's "Trading Nation." "People are getting out over their skis. They're bidding up valuations too high. They're ignoring negatives."

Paulsen, chief investment strategist at The Leuthold Group, has grown cautious during the past few months and sees 2018 getting hit with a "very scary" pullback.

"I lean a little more towards 15 percent," he said.

Paulsen doesn't believe it'll be a sign of a recession, however. He makes the case that synchronized global growth and President Donald Trump's pro-business policies should keep the U.S. economy out of a downturn for at least a couple of years.

But Paulsen is convinced the odds of a deeper and deeper pullback grows each day the stock market sets an all-time high — ans says optimism is way too high right now. The S&P 500 saw its 11th record close of the year on Monday.

"The thing that hits me the most is the whole premise of this bull — for both stocks and bonds over the last nine years — has been we've climbed a perpetual wall of worry the whole way. People have been conservative and thinking it would end at any moment," he said.

He contends that risks associated with rising 10-year note yields, high stock valuations and an unsustainable rate of positive economic and earnings surprises as a recipe for a steep market drop.

"You see inflation evidence creeping into the system," Paulsen said. "There's pressure building."

Yet there is a silver lining. Paulsen believes it'll give stock market investors a "whale of a buying opportunity."

And where would Paulsen start? He says likely with financials which should do well as 10-year yields rise.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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