Four indicators will, collectively, signal that the Bear has done her worst:

1. The TED Spread

Long time readers know how we cherish this indicator-the yield differential between the front-month 90-day T-Bill and Eurodollar contracts. It has kept its 100% accuracy rating through all the financial crises since 1974.

Why does it work?

Because the TED spread measures risk within the global banking system. Eurodollars are the primary instrument of inter-bank lending-unregulated and uninsured dollars. Therefore, the spread over T-Bills reflects bankers’ pricing of the risk in short-term loans to each other. It ALWAYS spikes in advance of a financial crisis. It ALWAYS falls when the crisis is past.

It has become even more sensitive over the years as the banking system has become more globalized and network-driven. Serious banking problems anywhere in the system can be enough to produce a flicker-or worse. In 1984, on the day Continental Illinois went down, the Fed’s onsite manager called Paul Volcker before 5 a.m. to tell him that the TED had opened at 415. That was enough to send all the Fed’s emergency operations into action. They swiftly checked with the eight biggest banks and found the trouble spot-the Continental Illinois. By 11 a.m., the Fed had bailed it out, using the FDIC (Federal Deposit Insurance Corporation) Fund to pay off the Japanese banks’ wholesale Eurodollar deposits that they were unwilling to roll over. (That may have been the largest-scale illegal act of a US public servant in history: the FDIC Fund had a $100,000 limit per deposit and it was limited to domestic depositors. Sometimes, a Fed Chairman’s does.) The TED peaked around 500 when Lehman collapsed and broke 200 last Friday. It is currently 197. We suspect that if it breaks 150 and stays there for at least a week, the financial crisis part of this drama, while not humdrum, will no longer command center stage. That means, it will be time to start buying stocks, if…

2. The Bank Stock Index continues to outperform the S&P

Since the Midnight Massacre, the BKX has been outperforming the S&P on a relative basis, for more than the requisite six weeks. That means, it will be time to start buying stocks, if…

3. The VIX Index retreats

Although the VIX leaps when there is serious trouble for stocks, it is actually a volatility index, not a measure of actual risk. It measures, for traders of S&P Futures, how wide is the price range of options on the S&P. As long as the S&P is trading in a +30 range day after day, the stock market is still fibrillating, and the patient is not yet ready to go walking in the park with a cane. It needs to retreat from its manic zone. That means, it will be time to start buying stocks, if…

4. The Yen and the US Dollar Decline

In an Orwellian paradox-Weakness is Strength-the yen and the dollar have outperformed other currencies. The yen and dollar indices are the currencies in which debt is denominated. They have been elevated sharply due to the deleveraging process; as US investors sell assets outside the US and repay debts inside the US, the dollar rises. The yen, as the instrument of the carry trade, suffers the same ignoble boost. By outperforming Eurodollars, pounds and other major currencies, they have been giving warning signals. They should revert to normalcy, and turn negative, when the distress sales of hedge fund assets and of bankrupt assets have dwindled.

When all four indicators have confirmed STOCKS WILL RISE .