An interesting news item crossed this afternoon. US markets have seen outflows for 8 straight months and December is working on being the largest since July 2002. I looked back at that market and a similar scenario occurred with the indexes in July of 2002.
The market bottomed July 2002, followed through, and then in 4 days almost gave back everything from the first day of the rally. But, the sell off failed to undercut the previous low keeping the rally alive. The market did muster a one month rally after that point before rolling over (of course this does not consider where the market was coming from or going, only that similar news was present). This scenario would continue to play into my belief that this market could still produce a very nice, trade able, and profitable rally.
If you've chosen to sit out in cash or went to cash in this rally, I would not fault you one bit. But if you can handle the volatility, then holding some positions through this sell off would not be condemned either. Of course if we do undercut the lows, the prudent course of action would be to move to cash unless you have a stock that is acting exceptionally well. If we do rollover here to test the November lows, I would still believe that a climactic type rally would still be in the cards early in the year unless the big cap stocks suffered severe damage.
Have a nice holiday and merry new year!!