Five Sparks for a Stock Market Comeback

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3. An End to Redemption-Related Selling by Hedge and Mutual Funds
Investors are likely to hang back and wait until they believe the deluge of fund-driven selling on any sign of strength in the market has petered out, says Krosby. There's an estimate that hedge funds still have to raise something like $200 billion to meet redemptions by the end of December. And mutual fund managers are also under pressure to sell securities to meet redemptions.

"There's almost a Pavlovian response every day at 3 p.m. [as people wonder] 'When is the selling going to begin?' That has to stop because you need to have investors feel comfortable that buying will beget buying, not technical selling," she says.

4. Increased Lending
Restarting the free flow of credit is another critical component in restoring investor confidence. A 187-basis-point drop since October in the three-month London Interbank Offered Rate (LIBOR), the rate banks charge each other for short-term lending of up to one year, and increased liquidity in the commercial paper market are signs that short-term credit has begun to loosen. But long-term lending remains stuck, says Skrainka at Edward Jones. The Fed's recent announcement that it plans to buy up to $500 billion of mortgages guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae, and another $100 billion of the corporate debt of government agencies, pushed interest rates on 30-year mortgages down three-quarters of a percentage point to around 5.50% as of early December. The 20% spread between corporate high-yield bonds and Treasury notes still needs to come down, however, he says.

Lower mortgage rates, which will give families a chance to refinance their homes and lower their monthly payments, will help unlock other credit markets, which will reignite business investing, says PNC's Stone. "Then private industry goes back to infrastructure spending, because frankly they couldn't [do that] right now if they wanted to because [companies] can't get loans," he says.

5. Tax Cuts
Krosby at The Hartford believes cutting corporate and consumer taxes would encourage spending and put a fire under the stock market. "I don't mean temporary tax cuts because you can't plan for how much money you have," she says. "If they are long-lasting cuts, then companies and consumers can make plans."

The goal is to spur demand on the corporate side and consumer side. Historically, tax cuts have been a significant catalyst for boosting demand, though that may not hold this time, depending on how bad businesses and consumers think the recession will get and how many jobs end up being eliminated.

A payroll holiday such as the one advocated by Democrats earlier this year could also help, she says. While campaigning for the Democratic Presidential nomination, Obama advocated a cut in the payroll tax, which finances Social Security, of up to $1,000 for middle-class households to offset the costs of not only gasoline, but also of food. Gas costs have come down considerably over the past three months, but consumer spending remains seized up amid bigger worries, such as job losses.

What to do until the pieces of a sustainable rally are in place? Until investors are convinced the catalysts are present for broader-based investing in equities, they can take some comfort in stocks whose dividends they think aren't in danger of being cut, says Krosby. "There's a worry that if profits continue to decline and aren't already discounted by the share price, that dividends are going to be cut," she says. "That's why you have investors only in companies right now that have very strong cash flow and balance sheets." In other words, investors might do well to hunker down with some high-quality names until the clouds lift.

Bogoslaw is a reporter for BusinessWeek's Investing channel.