The massive reversal in stock prices yesterday was not the beginning of a new bull market. We’re nowhere close to even starting a new multi-year secular rally. The economy is in shambles, the financial system is still a mess and corporate earnings don’t look especially appealing amid a severe consumer recession.

Worse, credit markets have started seizing again since February and that spells more trouble for the economy.

Yet I think it’s time to unload or sell any reverse-index exchange-traded funds.

The S&P 500 Index (see above chart) was extremely oversold heading into Tuesday’s trade with eight out of the last ten trading sessions sharply lower.

Investors Intelligence readings on market sentiment hit a record low last week with more than 70% of advisors polled predicting even lower stock prices.

Equity fund assets in the United States are worth less than money-market funds and investors have been net sellers of stock funds over the last 12 months. Also, mutual fund investors have been aggressively buying bond funds at exactly the worst time following a massive rally since mid-2007 and ahead of record Treasury issuance of paper over the next 18-24 months to finance monster fiscal spending plans and bailouts.

In short, the stock market, down more than 50% from its October 2007 highs, was looking increasingly attractive following a crash since September. Since September 1 the S&P 500 Index has crashed a cumulative 43%, including yesterday’s 6% gain. This is the second worst bear market in history.

Values at these levels do indeed look compelling and I think it’s time to gradually dollar-cost-average your way back into the stock market over the next 12 months. If you can sit tight in this market and don’t need the money, then stocks should appreciate over the next five years. This is a good entry point to start dollar-cost-averaging.

The first such installment should be made now – both domestically and overseas. Indexing will do the job nicely because all sectors have been slammed. No need to buy hedge funds or mutual funds.

I know we’ve got a laundry list of concerns in 2009, ranging from outrageous government spending, credit woes, bankruptcies, soaring unemployment, etc. The list goes on and on. Yet it’s important to remember that even amid total market mayhem in the 1930s the S&P 500 Index bottomed in mid-1932 and rallied more than threefold until 1937. Again in 1975, the broader market surged after crashing in 1973-1974. Stocks can rally after a series of relentless declines.

History doesn’t necessarily repeat itself. But history has clearly shown investors that the best time to buy or at least nibble at distressed equity values is exactly when stock prices are in the basement and investor sentiment is brutally negative. And that’s exactly the case right now.