A Mega-bull's playbook for market selloffs

There is no shortage of excuses when explaining why the S&P 500 Index (^GSPC) has experienced a wild ride this month. Whether it's the Ebola virus, the threat of ISIS or Europe’s weak economy, all three continue to create buying opportunities for long-time bull James Paulsen, chief investment strategist at Wells Capital Management. “On days of weakness I look to unloading on your defensive stock side, like utilities and staples which have really done well and start picking back again at the industrials, the basics and even energy stocks. Sort of getting yourself to a cyclical profile as we go into next year.”

To illustrate Paulsen’s point, investors can sell the Utilities Select Sector SPDR (XLU) and lock in an annual gain of 15% in favor of iShares US Basic Materials (IYM) which have declined 9% over the past month. Energy stocks, which may have further downside, are down over 12% this month as measured by the Vanguard Energy ETF (VDE).  

For those who have not been buyers of stocks during the October selloff Paulsen believes you will likely have more opportunities because the Federal Reserve continues to be in limbo. “The big elephant in the room, that’s been kind of the constant, that's still there, is investors realize that interest rates still have to be reconnected to the economic cycle and the Fed’s going to have to start raising rates eventually.”

Paulsen says it's very possible volatility (VIX) will spike again which could drive the S&P 500 back down to the 1820 level which the market tested last week. That would amount to about a 10% correction from the all-time high it set in September. He of course is a likely buyer of stocks on any day or days when we see pullbacks.

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