Is This the Sign That the Rally's End Is Near?

For months, stocks have been rising. For almost as long, people have been trying to figure out when the market's rally would end. Last week's market action gave those investors a wake-up call to restart their chant that the end is near. But is there any reason to think that this time will be any different from all the other false alarms about a pullback that we've seen so far this year?

A scary time
If you own stocks, it's never fun to see a big drop in the market. Memories of month after month of falling markets during 2008 and earlier this year remain fresh in your mind, and despite the gains of the past eight months, the mainstream economy doesn't appear to have shown much improvement in many key areas, such as unemployment and consumer confidence. The bankruptcy of CIT over the weekend is just the latest sign of uncertainty about where the economy is headed, as small and medium-sized businesses struggle to find new sources of financing.

In that light, last week's market action deserves some attention. The S&P 500 lost more than 40 points, its largest decline since May. Perhaps more telling, though, is the fact that after repeating a common pattern in which the market rebounded Thursday from its Wednesday plunge, stocks again fell sharply on Friday. Whereas many prior one-day drops had immediately rewarded those who bought on the dips, the new pattern has some investors feeling skittish.

Many investors have seen their portfolios recover a lot of ground lately, but the last thing anyone wants to do is to watch their paper profits go down the drain a second time. Yet for many stocks, that's exactly what started happening:

Source: Yahoo! Finance.

Most of the stocks above have seen some substantial gains this year, and even though Dryships and MGM are down overall since the first of the year, they've both bounced strongly off their lows in February and March.

If a correction is imminent, is there any reason to hold onto these stocks? Why should you simply sit there and let the stock market's losses take your money again?

Never cry wolf
Sure, it sounds appealing to get your money out of the market right before a big drop. Yet too often, the signals that seem so obvious at the time turn out to be false alarms -- and getting out ends up costing you money.

For instance, go back to early this summer. After the huge rise from March to mid-June, stocks started giving back some of their gains. The S&P 500 fell almost 5% between July 1 and July 8, giving back all its gains for the year as consumer confidence waned and June's unemployment report depressed the market's mood. People became convinced that a new leg down was starting.

Yet those who got out then missed a further 25% rally that took the S&P over 1,100. And although there's still plenty of negative news out there, things aren't all as bad as they were earlier this year -- and if those positives continue to develop, then 1,100 may well prove to have been just another brief stopping point in the S&P's upward move.

The right thing to do
It's tough not to get caught up in the noise of the market, especially when the mood goes sour. The impulse for self-preservation kicks in, and you don't want to repeat the same experience you went through last year.

Yet if your portfolio is sound and reflects your true tolerance for risk, then you probably don't need to change a thing. Only if you've been gambling on a comeback and shouldn't really have had so much money in stocks in the first place does it really make sense to make a major change right now. For everyone else, having the conviction to stick with your stock picks as long as the reasons you picked them still hold true should help you make the most in the long run.