How low the stock market can go

After seeing 1,000 points flash away from the Dow in this morning, 6% of their money evaporate this week to drop 8% from the recent highs- investors are wondering how much uglier things can get. The answer is: much.

The Standard & Poor's 500 fell another 3.1% Monday - dragging the index further below 2000 at 1918.85. Seeing such a rapid decline is a reminder this bull market has gone untested for too long and the pain could get worse - much worse to bring valuations back in line with reality.

"There will be more wringing out of this market. There's been too much optimism," says Chris Johnson of JK Investment Group.

Trying to guess how low a market under pressure can go is far from precise. Markets can overshoot on the downside just as they can soar too much on the upside.

But there are a few rules of thumb investors can analyze to try to put some parameters around the sell-off. Here are a few ways to look at how badly the market could react going forward:

•  Down 37%. Take this as somewhat of a worst-case situation. Currently, the S&P 500 is trading for 18.2 times its operating earnings over the past 12 months. If things were to get extremely ugly, investors might fear that the market's valuation by this measure might push to its lows. The market's lowest P-E since 1988 was 11.5 set in late 1988, says S&P Dow Jones Indices. If the S&P 500 were to fall to this low-mark valuation, which isn't a common view, that would put the index at 1,239, or 37% lower than current levels. Again, this is an extreme view. The market's average P-E since 1988 is actually 18.7 - which is slightly higher than were the market is now.

•  Down 20%. If there's a troubling sign, it's that stock prices have continued to soar even as company's revenue growth has been stagnant. The disconnect between growth and stock prices has created the unfortunate situation where stocks are trading for 1.8 times more than the revenue generated by companies, says Jack Ablin of BMO Private Bank. The 20-year median of this measure is 1.2, which implies the market could fall up to an additional 20% before hitting its median since 1990, Ablin says. The market hasn't traded at "fair value" by this measure since the beginning of 2014, he says. "You have to bring the financial markets closer to reality."

•   Down 9.1%. History gives a decent guide on what to expect. Since the bull market started, there have been a total of 14 declines of 6% or more from previous highs - putting them in line with this decline, says Bespoke Investment Group. On average, the 14 declines of this magnitude have extended to 9.1% and have lasted 31.6 days, Bespoke says. The current downdraft is 92 days old. But investors shouldn't take a false sense of security. There were two instances when declines were 10% or greater, Bespoke says.

•   Down 0%. If the S&P 500 ends the month above 2,000 - that will be a comforting sign for investors, Johnson says. 2000 is a key level not only because it's a round number, but because it's the 20-month moving average, he says. If the market holds the 2,000 level by the end of August, that will be a sign of strength investors a bit. But if it closed the month below, watch out, Johnson says. It would be the first time the S&P has fallen below its 20-month moving average since July 2011, he says. Prior to that, the last time the market broke its 20-month moving average was January 2008 - another bad time for stocks.

Despite these scary possibilities, though, neither Ablin nor Johnson think such massive declines are the most likely outcomes. Ablin points out the market has raced ahead faster than the economy - so it's been overdue to see the market's valuation come down. "The market has tripled from the bottom, but the economy has not tripled," Ablin says. Corporate balance sheets are still strong, which offers stability, and profit margins are high so its unlikely investors will be demanding such steep discounts on stocks as they have in during other periods of market duress, he says. "You have to re tether the financial markets closer to reality," he says.