Have markets hit bottom?

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Every stock market downturn has its bottom. Is this it?

Major North American indexes on Thursday were well off the gut-wrenching lows seen earlier in the week, when stocks headed straight down in a panic sell-off, suggesting that the worst of the turbulence has ended – for now at least.

At Thursday's close, the S&P 500 was down 0.29 of a point, or 0.01 per cent, at 1,862.20 – but the index is up about 40 points from its intraday low on Wednesday, and any sign of stability marks a striking contrast to the free-falls seen in recent trading sessions.

Canada's S&P/TSX composite index looked even better. It was up 183.1 points or 1.32 per cent, to 14,052, marking its first gain after four straight days of triple-digit losses.

Catching the bottom of a sell-off is difficult, of course. Anyone who witnessed the devastating bear market of 2008 knows that the occasional day of calm was followed by new sell-offs and lower lows.

During those brutal days, the S&P 500 didn't alter its direction until it had fallen 57 per cent over the course of 17 months.

By comparison, today's downturn looks mild: At its low-point on Wednesday, the index had fallen as much as 9.9 per cent on an intraday basis. That's not quite an official correction, defined as a cumulative drop of 10 per cent or more.

But there are encouraging signs that the worst is over, setting up potential buying opportunities for brave investors and settled nerves for anyone who prefers to watch the action from the sidelines.

Michael Hartnett, chief investment strategist at Bank of America, argued that the earlier decline in small capitalization stocks, commodities and high yield bonds served as harbingers of oncoming volatility.

These so-called canaries, though, are showing signs of life now.

The Russell 2000 index of small cap stocks fell more than 13 per cent between July and October, but has rallied by a total of 3.5 per cent over the past three days.

Crude oil dipped below $80 (U.S.) a barrel early Thursday, its lowest level in more than two years on concerns that the global economy is sputtering. It then rebounded by nearly $5 a barrel from the low, giving beaten-up energy stocks a big boost. By 4:30 pm ET it was up 0.70 of a point to $82.48 (U.S.).

Canadian energy stocks within the S&P/TSX composite index rallied 3.24 per cent – their first gain following an astounding 11 straight days of losses.

U.S. high-yield corporate bonds, which began falling in June, appear to be stabilizing. One exchange traded fund, the SPDR Barclays High Yield Bond ETF, has gained slightly since hitting a low on Monday.

In other words, the investments that led us into this downturn are now leading us out of it. The big question, though, is whether this upturn will last.

There are risks: A weakening global economy could clobber corporate earnings, making even beaten-up stocks look expensive.

As strategists at Pavilion Global Markets noted, analysts have been slashing their expectations for third quarter earnings for U.S. companies, as the reporting season gains momentum.

In addition, investor sentiment has not soured, which implies that capitulation – the hallmark of stock market bottoms – is still a long way off.

Indeed, this week's survey from the American Association of Individual Investors found that 42.7 per cent of retail investors are feeling bullish, up slightly from last week and above the historical average of 39 per cent.

However, there are no indications that the current bout of turbulence has to end with shocking losses and frazzled nerves.

Mr. Hartnett points to favourable conditions for U.S. consumers, including falling gasoline prices, declining mortgage rates and improving jobless numbers – and there is a big difference between slowing global growth and outright recession.

"We still believe lower returns rather than a bear market in equities...is the right call in 2014/15," he said in a note.

If the sell-off turns out to be relatively mild, the rebound could be equally unimpressive.