There are a few signs that Monday's rout, which ate away $1.2 trillion in U.S. stock-market wealth, could have marked a bottom. Some experts predict a...

Share story

There are a few signs that Monday’s rout, which ate away $1.2 trillion in U.S. stock-market wealth, could have marked a bottom. Some experts predict a short-term rally, at the very least, which may have begun Tuesday.

It’s never easy to call a bottom, especially in volatile times. And the government’s financial bailout plan, which failed in Congress on Monday, is a critical variable. Investors who thought Sept. 17 marked the bear market’s bottom turned out to be wrong after stocks crashed below that level.

First, the bad news. To reach the average bear market decline of 31.5 percent, the Standard & Poor’s 500 could fall further to 1,072.13 based on the last 10 bear markets, writes Sam Stovall, Standard & Poor’s chief investment strategist, in a client note. Monday’s plunge to 1,106.39 marked a 29.3 percent drop from its Oct. 9, 2007, peak.

But other historical measures are more comforting. Fear, as measured by the Chicago Board Options Exchange’s volatility index (VIX), spiked to a multiyear high above 48 on Monday. Based on historic stock performance following peaks in investor fear, JPMorgan Securities strategist Thomas J. Lee expects a one-week to one-month rally, with a gain between 7 percent and 11 percent. He notes, however, that longer-term relief requires an improvement in frozen credit markets.

Also, October has been tough on bear markets, as five of the last nine ended in the month, notes Stovall. More broadly, while September lived up to its reputation as a tough month for stocks, the market tends to gain in October, November and December, based on data since World War II.

Market plunges are also often followed by gains. On six of the last eight occasions the S&P 500 fell by at least 8.79 percent, the market was higher 21 days later, notes Merrill Lynch technical research analyst Mary Ann Bartels.

“Big sell-offs are often followed by relief rallies,” she writes in a note.