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Market analyst Jim Paulsen: More 'fear and capitulation' needed before stocks bottom

  • U.S. stocks still have lower to go – it's just a matter of if it happens "in a flash" or takes some time, says Jim Paulsen.
  • The market analyst, who is sticking with his call for a 10 to 15 percent correction, has been raising the alarm on market sentiment he believes is too bullish.
  • "We need to go lower to generate a level of fear and capitulation that can bring a bottom," Paulsen says.

U.S. stocks still have lower to go — it's just a matter of if it happens "in a flash" or takes some time, widely followed strategist Jim Paulsen told CNBC on Thursday.

Paulsen, who is sticking with his call for a 10 to 15 percent correction, has been raising the alarm on market sentiment he believes is too bullish.

And he thinks it's notable that Friday's initial market drop, when the Dow Jones industrial average shed 665.75 points, didn't generate the type of fearful behavior seen at a bottom.

"It didn't cause a great rush into safe haven bonds or rush into safe haven dollar or run into gold," the chief investment strategist at The Leuthold Group said in an interview with "Power Lunch."

"It hasn't really even generated a big rise in defensive stock performance on a relative basis. So I think we need to go lower to generate a level of fear and capitulation that can bring a bottom."

The market has been on a wild ride since Friday's drop. On Monday, the Dow plunged 1,175 points and on Tuesday it seesawed a total of 1,167.5 points before closing 567 points higher. On Wednesday, the blue-chip index posted its biggest one-day reversal since August 2015.

The Dow fell more than 650 points at its lows of the day Thursday.

"This is about a valuation readjustment," Paulsen said. "We have to find a lower valuation level for stocks and bonds to sustain this bull [market]."

While some have blamed the sell-off, in part, on concerns about higher interest rates and inflation, Mike Vogelzang, president and chief investment officer of Boston Advisors, points to a "small corner of the sandbox" — those who were in short volatility funds.

Two in particular have stood out amid the market tumult of the last few days: the ProShares Short VIX Short-Term Futures and the VelocityShares Daily Inverse VIX Short-Term ETN (XIV).

Both trade using leverage and provide inverse returns to the Cboe Volatility Index (VIX), a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. It's sometimes called the "fear gauge."

"They all forgot to take their Ritalin and at the end of the day they took a couple of trillion dollars off of market capitalizations around the world," Vogelzang said in an interview with "Power Lunch."

That said, he believes some parts of the equity market needed a breather.

"At this part of the cycle, this is all about economic momentum, a synchronized global economy, great corporate profits," Vogelzang said. "That's going to eventually trump this volatility trade."

— CNBC's Fred Imbert and Jeff Cox contributed to this report.

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