Stocks are at a real crossroads this week, as a trifecta of events conspire to make this potentially the most pivotal period of the year. The outcome could determine the market's direction for the next several months.

If stocks end this week lower, conservative growth investors may wish to sit out the next couple of months in cash, as an increase in downward volatility could sap their willingness to wait out the severe downdrafts that may lie ahead. More aggressive private investors may want to create portfolios that could provide buoyancy, and perhaps even an absolute lift, in difficult seas.

The problem is that this year is shaping up to resemble 1997-99 or 2000-02 much more than 2003. In those earlier periods, there were distinct groups of stocks that went up most of the time and distinct groups of stocks that went down most of the time. In contrast, in 2003 there was a broader rise in the market that lulled many investors into complacency.

Don't Look Back

To stay on the positive side of the ledger this year, investors need to focus their attention on the sectors and market-capitalization segments that are in favor, and not pine for the past or hope for the best. That means small- and midsized names in energy, steel, real estate investment trusts, and defense and utilities. It means turning a blind eye to the formerly go-go technology, retail and biotech sectors -- except for occasional trades.

What's happening? After slopping around the flat line for months, the Dow Jones Industrial Average took a turn for the worse last week and slipped to a -3% return for the year, while the Nasdaq Composite sank to the -6% level.

Even small-cap and mid-cap stocks, the last refuge of the past three years, ended the week slightly down for the year. When you consider that the Nasdaq was up as much as 7% this year, that's a tremendous descent. The last person to buy the Nasdaq 100 Trust ( QQQ) in January is in a world of hurt, and he has a lot of company.

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