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.

Recessions are very much like bear markets. They feel like they're going to go on forever, and that they'll keep just getting worse and worse.

It's so easy to tell yourself stories that "prove" it. You think about how when people lose their jobs, they have to spend less. Across the whole economy, less spending means less production. Less production means more job losses. It's a never-ending vicious cycle.

It plays out in other ways, too. If you lose your job, maybe you have to sell your house. But you can't sell your house, because prices have collapsed, so the bank forecloses and throws you out. The bank dumps the house at a fire-sale price. That lowers the price for all houses. Another vicious cycle.

When everyone is aware that these vicious cycles are in play, they become totally unwilling to take any risk. If they're investors, they won't buy stocks. If they're employers, they won't hire workers. If they're ordinary folks, they won't spend a penny they don't have to spend.

And yet, somehow, all recessions do end. Just like all bear markets do end.

What ends them both is value.

No matter how risk-averse you are, at some price you would be willing to buy stocks. Would you buy shares of, say, Microsoft (MSFT) if I offered to sell them to you at zero? Of course you would. How about if I offered them to you at a penny? You still would. Two pennies? Yep. We can keep moving up the price until we get to the point where your risk-aversion makes you finally say no.

In bear markets, the process works in reverse. The price of Microsoft falls until it finally gets low enough that even the most risk-averse investors will buy it. It's true for all stocks, and for the market overall. Three times now since early October, the Dow Jones Industrial Average has fallen to about 8,000 -- and then each time there was a huge rally. It happened just yesterday. Apparently for the Dow, 8,000 is the level where even risk-averse investors will buy.

The same thing applies to homes, cars, jobs and everything else. Trying to save money because you are scared about the economy? Maybe you are driving less, so you don't have to spend on gasoline? Now that gas prices have collapsed, you're probably re-thinking that. Suddenly it costs so little to fill 'er up, you say "why not?"

And suddenly, the vicious cycle is over. The bear market has ended. The recession has ended. Mysteriously, as though by magic, and without your really realizing it, things have picked up. Stocks are heading higher. Jobs are suddenly available again. Consumers are back in the stores. Who knew?

Now that the government-induced banking panic is over, all we have to do is find those levels of value throughout the economy, and this recession and this bear market will be over. Maybe they already are. If they're not, they will be soon.

Don't believe me? Then go ahead and sell stocks. Stop consuming. Then you'll be the one who creates the value I'm talking about -- and everyone else will get the benefit. Think of it as a public service.