A Sign of Things to Come?

Did your stocks survive the market plunge on Tuesday, Feb. 27? Yeah, neither did mine.

We aren't alone, at least. Only 13% of NYSE and 9% of Nasdaq stocks finished the day higher, and all 30 Dow Industrial stocks felt the market's wrath as well. Among the few in the green were Steve Madden (NASDAQ:SHOO) and Great Atlantic & Pacific Tea (NYSE:GAP).

After last month's drop and the subsequent market volatility we've experienced, investors have to be wondering whether this is a sign of things to come. Following 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 a subprime-lending blowup, rising oil prices, and tense geopolitical events is simply becoming a self-fulfilling prophecy.

Whatever the case may be, recent events are a reminder that there is, in fact, risk 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 uncertain market conditions.

Although Steve Madden and Great Atlantic & Pacific were two exceptions in last month's plummet, they show that not all stocks follow general market sentiment.

In fact, during the last bear market from August 2000 to March 2003, where 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 last month's market plunge served as a wake-up call, it shouldn't be seen as a forecast that all stocks are headed downward. Now is a great time to make sure that you're invested in financially sound companies with strong business models and reasonable valuations.

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

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