Stocks are selling off again today, as concerns mount on the fragility of Europe’s banking sector after the Spanish government forced the merger of four institutions, including a bankrupt mortgage lender. The comparisons between Europe today and the US around the time of the Lehman Brothers collapse in 2008 are inescapable, though not identical. One notable difference is the fact that the EU is already committing large sums to combat its problems.

This business is never easy and right now a good argument can be made for stocks heading in either direction from here. We’re starting to see divergences that suggest the decline is close to exhausting itself. Small cap shares, for instance, are outperforming the blue chips again. When buyers return to the little guys a turn is typically near at hand.

Also, sharp market declines such as what we’ve been through in the past month have traditionally been bullish. Looking at the S&P 500, going back to 1928, four-week selloffs of more than 10 percent have been followed by six-month gains of 9 percent (excluding dividends). The average 12-month gain was more than 16 percent, again excluding dividends.

In the context of bull markets, such declines invariably are followed by nice rebounds. In bear markets, however, it’s another story. In 2008, 2001, 1981, 1974 and 73, for instance, such declines gave way to even more selling—sometimes much bigger selloffs.Read more...