How quickly things change.

Less than a month ago, everyone had their eyes squarely focused on the sagging economy -- unemployment at levels not seen for more than 25 years, massive layoffs throughout the business world, and worries about the financial and manufacturing industries' ability to pull themselves back into viability.

Now, though, attitudes have turned positively rosy, and the market has followed suit. In just eight trading days, the S&P 500 has rallied nearly 16%. Since March 9, Citigroup (NYSE:C) almost tripled in value before falling back Thursday, while General Motors (NYSE:GM) is up over 70%.

Is it time to start celebrating the end of the bear market? Many analysts are skeptical, pointing instead to a much less positive outlook and arguing that the recent rally only reflects activity from short-term traders seeking to protect their profits made from betting against the market.

The basics of short-covering
This phenomenon, known as short-covering, occurs when investors who've sold shares of a particular company short choose to close out their positions. When they initiated the short sale, they borrowed shares of stock and sold them on the open market. To close out the position, investors buy back shares at the current market price and then return them to whomever lent them. If the price they pay now is less than the sales proceeds they received when they first sold the shares short, then they'll have a profit.

If many investors have made short sales of a particular company's stock, then the flow of transactions to close out those short positions can turn into a mad rush. When a short squeeze occurs -- as happened with Volkswagen shares in late 2008 -- those caught short often have to buy shares at any price in order to meet margin requirements or limit their losses. That artificially pushes stock prices up in the short run, until the short squeeze ends and prices fall back to more stable levels.

What this rally looks like
Many have noticed how recent gains have centered on stocks that are particularly popular among short-sellers. For instance, here are some of the companies with the highest percentages of their outstanding shares currently sold short:

Stock

% of Shares Sold Short

Return, March 9 to March 19

MGM Mirage (NYSE:MGM)

31.6%

38.2%

Hovnanian (NYSE:HOV)

32.7%

131.7%

Barnes & Noble (NYSE:BKS)

33.4%

38.2%

J. Crew (NYSE:JCG)

30.0%

45.2%

Blockbuster (NYSE:BBI)

25.9%

122.5%

Sources: The Wall Street Journal, Yahoo! Finance.

The main question, though, isn't whether short-covering is responsible for this rally. The key to a sustained recovery for stocks is getting average investors to recommit their money to the market. According to the Investment Company Institute, retail investors had more than $1.36 trillion invested in money market mutual funds as of last week. That amount could provide a huge stimulus to push stocks higher, even if investors move just a portion of it to riskier investments.

What to do
Although many typical investors reflexively start buying shares anytime the stock market puts together a multiday rally like this, you shouldn't be in a huge rush to buy. Ideally, you've had a regular investment program that you've followed throughout the market's ups and downs both last year and in 2009 and have already added plenty to your portfolio at these attractive levels.

If so, don't let the idea that you could miss out on the biggest rally in generations coax you into throwing the kitchen sink into stocks right now. Sure, you could miss the perfect market-timing call -- but you could also compound your losses. By keeping on track with an established investing plan, your emotions won't get the better of you, and you'll feel more comfortable with whatever direction the market moves in the future.

So as spring approaches, hopes increase that we've seen the worst of the bear market. Just remember that as everyone got way too pessimistic at the depths of the financial crisis, so too will they likely get overly optimistic at any signs of a recovery. Keep your wits about you, and you'll do a much better job of protecting your portfolio.

For more on what to do in today's market, read about:

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Fool contributor Dan Caplinger isn't doubling down on stocks right now, although he has continued to make his regular additions to the market. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't fake you out.