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Shares are hitting a delta excessive and the slowdown in progress is mistaken, says bull Jim Paulsen

There may be a new reason to follow smart money.

According to Jim Paulsen of the Leuthold Group, the stock and bond markets have been sending contradicting messages about the strength of the economic recovery for months.

But he thinks that only one thing is always right: bonds that anticipate slower growth in connection with hotspots of the Covid Delta variant before stocks.

"It was a big slump in July, with the 10-year [government bond] yield dropping to almost 1.1%," the company's chief investment strategist told CNBC's Trading Nation on Monday. "It indicated that Covid, the Delta variant, would be a big problem for the economy."

Although stocks are at or around record highs, Paulsen emphasizes that many of the winners are not tied to economically sensitive areas of the market. The trend, according to Paulsen, points to economic weakness and perhaps a further slowdown.

Meanwhile, government bond yields are solidifying – a signal that points to a brighter outlook for economic growth. The 10-year benchmark return is around 1.26%.

"They haven't come back to get back to that 1.10% level," Paulsen said. "That's a pretty big low they've hit and they suggest the Covid variant is likely to pass here soon and economic activity is likely to pick up."

Paulsen, who has approximately $ 1 billion in assets under management, believes it's best to listen to the bond market.

"They fell long before the stock market in early 2020. They hit their pre-market low in March 2020. They rose solidly through the summer through early this year," he noted. "And they were the first to overturn in the face of the second round of Covid here that we've seen lately."

However, the long-standing market bull admits that there are weak points.

"We're going to have some kind of higher inflation fears again … this year, and overall I think inflation will stay hot longer," he said. "Inflation could scare us and maybe even lead to a correction at some point."

Paulsen speculates that a setback in the stock markets would be temporary and inflation would ease over the next year.

Its top market games are dominated by groups that benefit from the economic recovery. Paulsen particularly likes small caps, cyclicals and international markets.

"I really think economic surprises that have been negative lately will turn positive when Covid hits its peak again," Paulsen said. "I would stay diversified, but I would focus on those areas of the market. I think the last four months of the year could be a nice run."

On Monday, the tech-heavy Nasdaq rose 227.99 points to end at 14,942.65, a record high. The broader S&P 500 hit an intraday high.

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