This time last year, markets had briefly undergone a minor hiccup when China's markets took a breather, the credit crunch demon had just briefly poked its head out, and some shaggy kid named Sanjaya was blowing up the charts on American Idol.

What a difference a year can make. Faster than it formed, the addiction to credit and the bubble it created came to a ceremonious close, taking a chunk of the economy with it. Home prices have been shredded, consumers are hanging on by their fingernails, and without some guy in China watching our backs, even twelve-figure stimulus plans might not be enough to save the day.

Threat con delta, economic style
We've had our fair share of trying times in years past, but this time around might prove a bit more dire than previous bouts. Some revel in blaming Ben Bernanke, others point to insane assumptions that led to hard-knocks lessons. I tend to think the problem is rooted deeper in our economy. In any case, it's tempting to want to curl up and wait for these shenanigans to end, assuming they ever will.

Time out. Be brave.
The other side of the coin says we've already bled out a tremendous amount of our overindulgence, enduring almost a year of consistently negative news, and assumes the economy's darkest hour is already behind us. Rather than assuming the Grim Reaper shares an office with Bernanke, it proposes we've reached, or are at least nearing, a bottom. As Oscar Wilde once quipped, "We are all in the gutter, but some of us are looking at the stars."

That theory likely holds quite a bit of weight. Once hated dot-com poster children like (Nasdaq: AMZN) and Cisco (Nasdaq: CSCO) turned out to be sound investments after fearful investors left them for dead. Just as periods of hype and jubilation are often followed by a painful market correction, periods of overwhelming negativity plant the seeds of runaway buying opportunities. And by any measure, this qualifies as a period of overwhelming negativity.           

Trying to find an absolute market bottom is typically a fruitless endeavor, but there are encouraging signs that enough pessimism has already been priced into the market and that brighter days may lie ahead. Consider, for example:

  • Citigroup (NYSE: C) recently rallied nearly 7% on news of a $5.11 billion loss.
  • Merrill Lynch (NYSE: MER) has soared more than 14% in the past month, even after announcing a 69% drop in quarterly revenue.
  • Washington Mutual (NYSE: WM) has popped 14% since coming out with one of the worst quarters in years.
  • Build-A-Bear (NYSE: BBW) shares recently jumped after disclosing a 20.7% plunge in earnings.

If you're looking for a ray of hope in this dicey market, that's encouraging news. Of course, by no means does it ensure everything will be hunky-dory from here on out. But it's important to acknowledge that the amount of trauma markets have been subjected to has real value. What ultimately caused this fiasco was a disconnect between asset prices and their true underlying value. Once prices get slapped around a bit and find their way back to reality, opportunity in what had been the red-headed stepchildren of the market presents itself. 

Staring at the market's bear bottom
Another encouraging sign that the worst might be behind us comes from what some saw as a telling sign of how troubled we are: the out-of-left-field collapse of Bear Stearns. In all likelihood, what took down Bear wasn't actual credit losses on its books, but more of a modern-day run on the bank. Bear's counterparties -- which include big banks and titanic hedge funds -- ceased doing business with it out of fear and uncertainty.

Why was this an important event? I'm hardly a Jim Cramer-holic, but I'm reminded of his wife's words in his tell-all book, Confessions of a Street Addict. While trying to soothe a rattled Jim who wasn't having much of a booyah day, Cramer's wife, Karen, lectured, "at the bottom, even the coolest, most hard-bitten pros blink. At the bottom, the last bulls throw in the towel. At the bottom, there is final capitulation. ...That's how I know it's a bottom."

Whether or not Bear's tumble into JPMorgan's (NYSE: JPM) arms signaled a final crescendo of the market's wrath is yet to be determined; what is certain is that when a bottom does form, it will look a heck of a lot like it did to Cramer's wife that day.

When the "smart money" exits en masse, screaming bloody murder, the "smarter money" breathes a sigh of relief, knowing every bit of overoptimism has left the building.

Good riddance.

Related Foolishness: is a Stock Advisor recommendation. JPMorgan Chase is a currentIncome Investor selection, while Washington Mutual is a former pick.

Fool contributor Morgan Housel does not own shares in any of the companies mentioned in this article. He appreciates your questions, comments, and complaints. The Fool's disclosure policy is all about investors writing for investors.