The recent plunge in equities has returned the Dow Industrials index to the “six-bear average” path last discussed in a post in June.

The six-bear average is based on previous recoveries after large bear markets involving a decline in the Dow of about 50%. The bear market trough was set to 100 in each case and the subsequent paths averaged. The starting level of the average was then aligned with the Dow's trough of 6,547 on 9 March 2009.

The six-bear average has proved a useful guide to the trend in the market since the 2009 low, with stocks fluctuating around the implied path – see chart, which also shows the six components of the average. (These refer to the recoveries from the bear market troughs in November 1903, November 1907, December 1914, August 1921, April 1942 and December 1974. The Dow fell by 45-52% into these lows versus a 54% decline between October 2007 and March 2009.)

The Dow closed at 11,384 on Thursday 4 August versus a six-bear average level of 11,357.

The bad news is that, although stocks are now close to the average, the average itself is declining, with a trough scheduled for late October. Of course, an undershoot – such as occurred last summer – is possible.

The good news is that, from the October trough, the average embarks on a sustained rise to a new peak in October 2012.

The suggestion that a buying opportunity is developing is supported by a reacceleration of global real money supply growth since early 2011 following weakness in late 2010. This pick-up, however, has been driven by strength in the US and Japan, with Eurozone real money contracting, contributing to sovereign debt woes. ECB policy easing to relieve the current liquidity squeeze may be required for stocks to resume an upward trend.