Tidings of a bear market rally: James Saft

James Saft is a Reuters columnist. The opinions expressed are his own.

By James Saft

NEW YORK (Reuters) - Some time before the end of the year it is a good bet that stock markets will throw off their gloom and begin a powerful rally of as much as 15 or 20 percent.

Some time one to three months after that it is a good bet that the prospect of a deep global recession and shockingly bad earnings will send them right back down again to make new lows. Rallies in the midst of bear markets can be sustained, powerful and feel very much like the ones that often mark the beginning of a real recovery.

So, why should we believe that we could get an early, if transient, Christmas present from the stock market?

Global markets are more scared, tired and depressed than at any time in my reasonably long memory, excellent breeding conditions for a rally. Given that most people are now on the same side of the debate, it would not take terribly much by way of money being committed to developed market stocks to send them higher. There may even be some momentum investors left who will pile on if a rally can get just a little traction.

The Vix .VIX index of stock market volatility hit a record high of 89.53 last week while the ratio of bulls to bears is at a several year low. And stocks have absolutely cratered -- the S&P 500 .SPX index is down more than 40 percent this year and was heading lower at the time of writing.

Secondly, in historical terms valuations are as good as they have been in quite a while and increasing numbers of stocks are appealing to even the most hard-bitten value managers.

Perhaps most compelling, bear market rallies are simply what often happens in these circumstances. Nothing, not the housing market, nor the Roman Empire nor Alan Greenspan's reputation keeps going in a straight line in one direction.