Bear markets and their recoveries rarely have a clear V shape, and this one is trickier than usual

by the agency of Peter Carbonara

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Since the stock mart entered bear territory in July, market strategists possess been looking for signs of "surrender"—the evacuant sell-off, the proud washout that sets the stage for a stock market recovery, though probative. On Oct. 7, after Monday’s brutal selling, economist and expert manaeuvrer Edward Yardeni spoke for a lot of persons at the time that he wrote in a note to clients: "I’m not sure, but that sure seemed like surrender yesterday."

Yet clean inflection points, when stock prices make a decisive manner up, are devilishly tough to spot. In prior downturns there esteem been moments when prices plunged to what looked like a market bottom from which they could start climbing again, sole to move laterally or hesitate. In the spring and summer of 2001 the Standard & Poor’s 500-stock index seemed to recover from the dot-com collapse of the previous year, only to turn down in late summer, even before September 11.

Back in October 1974, prices plunged, rallied, and then fell again in December. In contrast, the crash of October 1987 was followed by a clear and quick recovery. But that abrupt drop was widely attributed to the effects of automated selling and wasn’t long enough to qualify as a bear market.

As for the recent wave of panic selling, Barry Ritholtz, director of right research at Fusion IQ, a New York fiscal research firm, says that while we may be at a nadir, he doubts it. "The bottom determination consider reach when mob statement: ‘Screw equities,’" Ritholtz says. He adds that the crisis now weighing on the market—an epic deleveraging wave, a weakened financial rule, and every historic housing bust—is far greater degree of complex and fast-moving than either the dot-com collapse or the oil shock recession of the soon 1970s. So previous bear markets may not be of much guidance this fit season around.

That’s not to say a bounce-back of sorts isn’t perhaps so. Fritz Meyer, senior emporium strategist for mutual fund giant Invesco Aim, says a number of metrics he keeps his eye on—including the number of new lows on the New York Stock Exchange (NYX) and the Chicago Board Options Exchange’sitting Volatility Index (the so-called fear director)—tell him that market pessimism has gone too far.

Meyer thinks U.S. equities are at or near a bottom, pointing out that most bear markets stabilize at a level roughly 30% below the market’session prior high, which is about where the Dow and the S&P are now. He also notes that past 15-year periods, equities produce average annual returns in the double digits. "The stock market has this signal endowment to revert to a mean return of about 10%," he says.

Trouble is, the Dow Jones industrial medial sum is after this about where it was 10 years ago. So stock market returns would have to be stupendous immersing the next five years to produce double-digit average returns.