OK, give them a star on the forehead for trying. The bulls managed to rally stocks Monday on word that the federal government had seized Fannie Mae and Freddie Mac.

But investors woke up yesterday with second thoughts -- and the selling promptly resumed, with a vengeance. At the close, the Dow was off 280 points, while NASDAQ and the S&P 500 registered even bigger percentage losses.

What's the matter here? I guess you could come up with any number of explanations, but I'll keep it simple. Too many people are too eager to assume that "this latest bailout will do the trick."

You would think they might have learned a lesson from the failed rallies that followed the August and November 2007 market bottoms. Or from the fakeout bounces that succeeded the January and March 2008 lows.

But no. As soon as the Treasury announced July 16 that it was standing behind Fannie and Freddie's debt, folks jumped to the conclusion that the bear market was over.

In his nasty, sadistic way, Mr. Market is now punishing those investors who insisted on buying too soon, against the evidence.

As a result, we're rapidly closing in on a full-fledged "test" of the July index lows. If we're lucky, the Dow and the S&P will undercut their July intraday benchmarks by only a couple of percentage points. However, I'm not going to predict the bottom; I'll let my indicators tell us when it's in sight.

I don't want to leave you with the idea that I'm unremittingly gloomy on the stock market. I'm finding some excellent values these days that I think my Profitable Investing subscribers will enjoy. I'm confident we'll get through this rough patch. Patience will pay!

Yesterday was another sour day on Wall Street, as investors ignored the Fed's $85 billion bailout of AIG and worried who might be the next shoe to drop. I certainly have to agree that the last few minutes of trading were ugly, with the stock market closing just about flat on its bottom. But -- yes, there's an encouraging but!

As bad as yesterday's session was, it brought us much closer to a resolution of the market's problems. Finally, we're starting to get the kind of technical readings that could help put in a solid bottom, possibly by the end of this month or sometime during the first half of October.

On the sentiment front, the CBOE Volatility Index, which I discussed in a Special Alert I sent to my Profitable Investing subscribers on Monday, skyrocketed to 36, its highest close since March 2003, when the first bull market of the new millennium lifted off. That's a sign of pervasive, palpable fear. From a contrarian point of view, fear is necessary ingredient in all major market bottoms.

Likewise, some of my gauges of 10-day market breadth and volume are pointing to the likelihood of an initial, tentative bottom soon. Mr. Market will no doubt "test" this bottom a couple of times in the weeks ahead, but at least the process is now unfolding as history tells us it should.

What to do now? Ramp up your buying.

I can't sign off without a comment on American International Group (NYSE: AIG). The federal "line of credit" is better than bankruptcy -- it preserves at least a tiny bit of value for shareholders. However, the central fact of the deal is that the federal government now owns 80% (79.9% to be exact) of the company.

Thanks to Uncle Sam's lifeline, AIG will almost certainly survive in some form. Even if the business recovers completely, though, the dilution will hold back any appreciation in the shares. I estimate that, at best, AIG stock will trade in the $10-$14 range five years from now.

For most investors holding the stock in a taxable account, it makes more sense to sell now and capture the loss.