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Strategist: S&P 500 to Reach 1350 in 2010?

Wells Capital Management chief investment strategist Jim Paulsen believes there's a case to be made for the S&P 500 to reach 1350 in 2010.

He says to consider the "rule of 20," which says that price-earnings multiples should be equal to 20, minus the current annual consumer price inflation rate. The S&P can get to those levels if you assume a 3 percent consumer inflation rate for 2010, and a 17 PE ratio.

Paulsen says a big challenge for markets in the coming year will be gaming when the Fed will revise its extreme low rate policy. "The conversation is starting to get beyond the double dip. The question now is how fast will the Fed step in," he said in a recent interview.

Paulsen believes the Fed will alter its posture once job creation begins, and that could be as early as the first quarter. But he does not believe a tightening Fed is a bad thing for stocks, at least initially. "When the Fed tightens, things are back to normal," he said.

Paulsen said the stock market will have a more difficult road higher in 2010 than it has had since March, and there could be a correction. But he said the longer the market goes without a correction, the more potential it has to pull in new money. "People are waiting for a sell off. If we don't get it, at what point do they come back in?" he said.

"We've got to get to where we're seeing people worried about missing a reward, as opposed to worrying about a risk," he said. "Everybody is acting like risk is high. The reality is it's low," he said.

Paulsen brought some interesting charts with him to our interview that show how the stock market might behave if it followed the path of markets after other selling panics.

Each of the charts shows a strikingly similar pattern to the current stock market recovery rally. They also show how the market continued to go even higher. The periods include 1903/1904 (above). More below include ....

...1907/1908...


...1920/1921...

Each of the charts shows a strikingly similar pattern to the current stock market recovery rally. They also show how the market continued to go even higher. The periods include 1903/1904 (above). More below include ....

...1907/1908...


...and 1974/1975.

Each of the charts shows a strikingly similar pattern to the current stock market recovery rally. They also show how the market continued to go even higher. The periods include 1903/1904 (above). More below include ....

...1907/1908...



(He did not include the 1930s when stocks sold off again after an initial recovery.)

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