A Sign of Things to Come?

Did your stocks survive the 3% market dip on Aug. 9? Yeah, neither did mine.

We aren't alone, at least. Only a handful of stocks survived the carnage that day. Among the few in the green were The Knot (NASDAQ:KNOT) and Walgreen (NYSE:WAG).

Considering the market volatility we've experienced recently, investors have to be wondering whether this is a sign of things to come. And after four solid years of market gains, it wouldn't be out of the question for the market to enter a prolonged selling period.

On the other hand, perhaps the markets are so convinced of an impending slide that the confluence of global credit concerns and the subprime mortgage fallout is simply becoming a self-fulfilling prophecy.

Whatever the case may be, recent events are certainly another reminder that there is, in fact, risk and volatility in the stock market.

Lesson learned
While this might be a great time to reassess your risk exposure, it would be folly to blindly sell off your stocks based solely on recent events.

Although The Knot and Walgreen were two exceptions on Aug. 9, they show that not all stocks follow general market sentiment.

In fact, during the last bear market from August 2000 to March 2003, when the S&P shed 42% of its value, fully 1,810 stocks posted positive gains.

Among those were:

What's their secret?
The stories behind each company's bear-market growth are vastly different. Occidental Petroleum capitalized on the growing global demand for oil, eBay continued to define the online-auction market, and Starbucks provided a caffeine fix to millions of customers.

But all of them did share something in 2000: free cash flow. In other words, each company was fiscally sound and was generating extra cash by the time the bear market rolled around. This made it much easier for them to go about business as usual during a very hectic time for the U.S. markets.

Bringing it full circle
So while recent market volatility has served as a wake-up call for investors, it shouldn't be seen as a forecast that all stocks are headed downward. Now's a great time to make sure you're invested in financially sound companies with strong business models and reasonable valuations.

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This article was originally published Feb. 28, 2007. It has been updated.

Fool contributor Todd Wenning's random '90s movie of the day is Mo' Money, starring Damon Wayans. He owns shares of Starbucks. eBay and Starbucks are Stock Advisor picks. The Knot is a Motley Fool Rule Breakers choice. The Fool's disclosure policy believes that a job ain't nothin' but work.