First Panic, Then Euphoria. Probably.

Tobias Levkovich, chief of U.S. equity strategy at Citi Investment Research, issued a brief report last week titled "Hopelessness Setting In." He noted that many investors appear to be giving up on the stock market. Prices are hitting new lows in heavy trading, he said, a sign that "there is a foreboding sense of despair developing." There is no question, Levkovich added, that a bear market is underway, as 60 percent of the stocks in the Standard & Poor's 500-stock index are trading more than 20 percent below their 52-week highs.

But wait! he said in the next breath. Several of Citi's calculations suggest that stock prices are exceptionally undervalued and that a market recovery is highly probable six months to a year from now. One calculation looked at companies' earnings relative to their stock prices. It showed that shares are 20 percent undervalued compared with 10-year Treasury notes and the usual risk for owning stocks.

The problem, Levkovich said, is that investors want a turnaround right now, and they're looking for something to set it in motion. One possible catalyst, he said, may be evident in what Citi calls its Panic/Euphoria Model. That gauge has detected investor sentiment moving into panic territory. By Levkovich's reckoning, that means there is a 92 percent chance that stocks will rise in the next six months and a 97 percent chance of gains within 12 months.

Levkovich reminded investors that the Federal Reserve still has room to cut interest rates and that rate cuts need time to work their magic in turning markets around. Patience, he counsels: "Being in it for the long term appears to be more of a catchphrase than a reality anymore." -- Steven E. Levingston