Market panic enters late stages, sharp rebound coming soon, strategist Jim Paulsen says

December's ugly stock market could help launch a 2019 rally to remember, according to Jim Paulsen.

The Leuthold Group chief investment strategist believes Wall Street panic is in its later stages.

"You're hearing a lot of calls for recession, you're hearing a lot more people calling this a bear market," he said Friday on CNBC's "Trading Nation." "We've done a lot of damage here with sentiment."

Damage, indeed.

The S&P 500 is coming off its worst week since 2011. The index is off about 18 percent since its all-time high of 2,940, hit on Sept. 21.

The Dow is also getting pummeled, down almost 17 percent from its record high. It saw its lowest close on Friday since August 2017.

"We're getting close to the bottom," Paulsen said, adding that it appears negative sentiment is "getting close to burning out."

Jitters over the trade war with China, slowing economic and earnings growth and the Federal Reserve's policy on interest rates have been largely driving this year's downturn.

However, that could soon change.

"I think economic reports are going to go soft coming up. But if they do, that might be a catalyst that convinces the Fed and bond vigilantes and investors, in general, that the rates are no longer going up," he said. "The Fed may even ease, and maybe we have a 2019 year where the market can advance without rate increases."

According to Paulsen, that could help wipe out negative sentiment and spark a rally that will bring the S&P 500 back to its all-time highs in the first half of 2019.

WATCH: Don't panic when stocks are getting slammed

However, his bullish forecast comes with a warning.

Even though Paulsen says the panic is subsiding, he acknowledges the secular bull market is on borrowed time.

"I do think we might be getting close to one last good buying opportunity, and one last run here before this bull finally does end," he said.

Meantime, he is not bailing on stocks and favors beaten-down portions of the market, particularly emerging markets and energy.

"It's OK maybe to start leaning in and buying some of these things that people are starting to give away," Paulsen said.

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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.

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