The good news is, despite most so-called investment gurus predicting financial Armageddon, the economy isn’t on its death bad. The bad news is, not enough investors are going to be convinced of that anytime in the near future. It’s a problem for stocks simply because the majority of the market’s players have to agree that stocks are “worth it” before said stocks make any bullish progress.

There is a light at the end of the tunnel, though, if you can look past all the distractions between here and there.

A Fragile Psyche

The market has a personality … and a memory. Like people, it can tolerate a little fear and still snap back pretty quickly. If you really terrify it, though, it can take a long while for it to rebound — a timeframe measured in weeks rather than in days.

The 17% plunge experienced during the prior four weeks easily qualifies as the kind of experience that that can require a long healing period.

There’s plenty of historical precedence for the “on hold until further notice” effect, too. The Flash Crash of mid-2010 is a recent example. At one point back on May 6 of last year (the “Flash”), stocks were in the hole by 8.5%. Although the market actually began to recover quite nicely that day and even rallied the following four days, the psychological damage had been done — investors simply didn’t trust stocks.

In fact, investors didn’t trust stocks again for nearly four months after that, when the final bottom was hit.

And just to be clear, there was absolutely no change in the market’s underlying fundamental value because of the Flash Crash. It simply was an unforeseen chain reaction of program trades. Didn’t matter. Traders simply wanted nothing to do with stocks until the plunge was a fading memory.

A similar situation unfolded in early 2004, as well. A mere 5.6% dip over the span of two weeks in March of that year (the economic recovery still was in doubt by some then) put the kibosh on stocks until the middle of September 2004. That was when the third and final major bottom was made during that five-month soft patch. As was the case in mid-2010, both earnings and the economy continued to grow during that time. Investors simply didn’t care, convinced it was the beginning of a re-entry into a recession.

So how long will it take us to work through the mental kinks this time around? Assuming four to five months still is the applicable timeframe, that puts the end date of the debacle sometime around November or December — if you start the clock with the mid-July peak.

But there’s actually a decent argument that this batch of fear started brewing in early May, when the market began a six-week, 7.2% sell-off. From that point, the required healing time will be wrapped up sometime in October.

As it just so happens, that’s perfect timing. The fourth quarter is generally bullish beginning in mid-October anyway, and there’s a perfect catalyst coming at that time — third-quarter earnings. Expectations are stunningly low, so even moderate success on the earnings front will only fan the bullish flames at that time.

In the Meantime

As was described already, modest hits on the market are mended pretty quickly. Such a rebound often is shaped like the letter V, or sometimes the letter U. Traders also sometimes suggest double bottoms are required to rekindle bullish trends, which would best be described as a W-shaped chart (two distinct pullbacks and bounces).

When you’re talking about the kind of hit the market took over the past four weeks, though, even a lone W doesn’t work all the kinks out. The market might need to work through two consecutive W patterns to finally hit the “reset” button.

Again, there’s precedence for expecting multiple bottoms now. It took four decisive lows to complete the post-Flash Crash 2010 lull, and it took three (arguably four) major lows in 2004 to rekindle the uptrend at that time. We’ve only seen two key lows so far, and that’s counting this week’s and the one from two weeks ago as separate lows; some traders would only count the cluster as one major bottom.

It’s an important idea to accept because — if history is indeed repeating itself — the market is going to dole out a few more fakeout moves that investors don’t want to fall for. This applies to the bears as well as the bulls.

Bottom Line

Simply put, had the market not completely unraveled at the seams a month ago, we might already be on the road to a recovery. The deep wound, however, has spooked most investors off the field and onto the sidelines where they’ll likely remain through October. It’s not rational, but it’s reality.

In the meantime, the lack of clarity along with the lack of interest is going to make a tetherball out of the market.

Wake me up when September ends.