How to Tell When the Bear Market Is Over

Every single bear market feels like it will go on forever. But none of them has. The average bear market, over history, has lasted 13 months.

Every single bear market feels like stocks are going to zero. But they never do. The average bear market, over history, has racked up stock losses of 33.2% at the point of greatest decline.

It feels like this bear market will go on forever. It won't. So far it's lasted 13 months, the same as the historical average.

It feels like stocks are going to zero. They won't. So far stocks have lost 44.2%, a third-again the loss of the average bear market.

So there's no reason based on historical norms to expect that this bear market has to go on a lot longer or get a lot worse. But based on emotion, it feels like it will. This one feels especially violent, and you can see that in the fact that an above-average loss has been experienced in the average 13-month bear-market duration.

But I really think we're at the end of this bear, or close to it. Let me define my terms. This bear market will be over -- correction: will have been over -- when we can look back and see that stocks have rallied at least 20% from any given low point, over at least two calendar months. That 20% move meets the minimum definition of a bull market. It may be no more than 20%, and it may last only a short time -- or it may go further and last longer -- but that's the minimum definition I'm using.

I think we're at the end because I think the fundamental event drivers that set this bear market in motion in the first place have changed.

The thing that started it was a series of botched government "rescues" of troubled financial firms -- Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, AIG, Washington Mutual and Wachovia. These interventions (or lack thereof in Lehman's case) -- which in each instance pretty much wiped out the companies that were being "bailed out" -- made matters worse, turning a typical credit crisis into a full-fledged banking panic.

But now the Treasury's TARP program, along with new programs from the Federal Reserve and the FDIC, are really helping. Financial firms are still going to have to struggle. And heaven only knows what they're going to do for earnings growth in the future. But the risk of a global meltdown of the financial system is now off the table for sure.

First the regulators created a runaway train of cascading failures of financial firms. Then they stopped the runaway train they themselves created with the massive cash infusions of the last month. That's a very, very good thing.

But when you stop a runaway train, some bad things happen.

When a train is headed downhill at 100 miles per hour and you suddenly stop its engine, what happens to all the freight cars the engine was pulling? They smash into each other, they jack-knife, and they jump the tracks, spilling their contents all over the countryside. Better than a runaway train, but still a huge mess. That's where we are now: a huge mess called a recession.

Make no mistake about it. Until a couple months ago we were not in a recession. It was just a slowdown. But the banking panic set in motion by the botched bailouts turned that slowdown into a very sudden recession. We're definitely in a recession now. The only question is how long and how deep.