During periods of market volatility, it's helpful to step back and examine the broader historical perspective. Here's a chart showing the weekly close of the S&P 500 from 1950 to the present. The red line represents a linear regression of all the weekly closes. In simple terms it's a trendline through the more than 3,000 weekly closes such that the sum total distance of the closes above the trend is the same as the total distance below the trend.

The chart above uses a logarithmic (log) scale for the vertical axis so that two equivalent percent changes have the same vertical distance on the scale. This concept becomes clearer if you compare the 48.2% decline in the S&P 500 in 1973-74 with the 49.1% decline in 2000-02. On a log chart these two declines appear similar, whereas with a linear vertical scale, the recent decline looks far more severe.

Above and Below the Trend
An examination of the log chart shows an interesting pattern of multi-year periods of index closes above and below the trendline. From the beginning of our data in 1950 until mid 1954, the index remained below trend. For the next 15 1/2 years, the index rose above trend. But in late 1969, the index dropped below trend for the next 25 years, aside from a bit of bobbling around the line in 1971-72 and again in 1987.

That brief rise above trend in 1987 was followed by a sharp drop that made stock market history as the Black Monday crash of October 1987. Over the next eight years, the index gradually rose to the trendline, but that line remained a ceiling until 1995, which marked beginning of the Internet Bubble -- the dramatic rise and fall in equities associated with Y2K technology investing and the accelerating growth of the Internet.

The bursting of the Internet Bubble briefly dropped the S&P 500 below trend. But it soon recovered, and for the next few years the trendline has seemed to provide a floor for the index in much the same way as it acted as a ceiling in the early 1990s. However, earlier this year, the S&P 500 briefly dipped below trend and at this moment hovers right on the line.

Flirting with the Bear?
The US economy is teetering on recession. The major indexes are well off their highs of last October and bordering on Bear Market territory. Since 1950 the average of the nine recessionary declines of the S&P 500 has been 25.5%. At its current level (around 1278) the index is about 18.3% below its October 2007 top, and the Dow is down 19.9%.

A 20% decline in the S&P 500 — a level of 1,252 — would put it in bear market territory. Since 1950, the average of the eight bear market declines in the S&P 500 has been 33.2%.

Incidentally, the correlation between recessions and bear markets since 1950 has been erratic. Five of the eight bear markets did not overlap with a recession. And four of the nine recessions occurred without the 20% dip that qualifies as a traditional bear market.

If we're headed into official recession or bear market territory for the S&P 500, the data since 1950 shows an average of 14 months from previous high to the recession low and 15 months from previous high to bear bottom. At present, we're 8.6 months beyond the recent highs. If our current decline follows the historical averages, we could see a market bottom in December or January. But these averages are calculated from wide variations. The historical range from market top to recession bottom has been 4 to 21 months, and for bear markets the top-to-bottom range is an even wider 3 to 31 months.

The Best Case Scenario
The most optimistic view is that we've already seen a bottom in the S&P 500 — 1273.37 on March 10th. This would represent a decline of 18.6% with a bottom appearing 5.1 months after the October high. This scenario is indeed within the historical range of mild recessions, the four out of five that didn't push the index into bear territory. These minor economic slumps averaged 4.5 months with a 15% decline.

On the other hand
If the "Sell in May and Go Away" strategy has much of a following this year, we will probably see some additional downside movement. More troubling is the fact that none of these previous mild recessions was associated with anything like currently deflating housing bubble and the continuing credit crisis. An additional drag is the inflationary pressure from skyrocketing energy costs and the potential risk to energy supplies from the forthcoming hurricane season.

Whatever the case for the recent market slump, we can be confident that every market downtrend eventually reverses.