It only takes a small rudder to steer a gigantic ship. It only takes a small bridle to control a powerful horse. It only takes a small, long-term buy/sell decision to make or break ones financial future. Buy or sell at the wrong time, and your portfolio may feel the consequences for years to come.

Up - down, up - down, up - down, has been the market's pattern over the past five to ten trading days. This is the same pattern the market displayed over the past decade.

Unfortunately, the 'down' portion of this familiar sequence is becoming more and more pronounced, both, over the short and long-term.

We've seen two major declines since the tech-bubble (NYSEArca: XLK - News) burst in the year 2000. Both declines were followed by significant rallies. Knowing when to buy and when to sell continues to be of high importance.

$10,000 invested in the S&P 500 (SNP: ^GSPC) 10 years ago would be worth $7,774 today.

$10,000 invested in the S&P 500 at its 2000 high would be worth $6,974 today.

$10,000 invested in the S&P 500 at its 2002 low would be worth $13,724 today.

$10,000 invested in the S&P 500 at its 2007 peak would be worth $6,805 today.

$10,000 invested in the S&P 500 at its 2009 low would be worth $15,754 today.

Obviously, it is impossible to pick every market top and bottom every time, but the numbers above show that it pays to be observant and pro-active. Unless you bought right at the 2000 and 2007 peak, buy-and hold investing was about the worst possible approach to investing (22.26% 10-year loss).

The patterns behind major tops and bottoms

Whether you should buy the dips or sell into rallies depends largely on the bigger trend. In an up-trend you would want to buy the dips, while selling into rallies is the smart thing to do in a down-trend.

The tricky part is to discern whether we find ourselves in a long-term up or down-trend, and how long that trend will last.

On March 2nd for example, the ETF Profit Strategy Newsletter sent out a Trend Change Alert to subscribers on record, predicting the onset of a massive rally, the biggest one since the 2007 all-time highs. Sure enough, the rally started a few days later, on March 9th, and has since lifted the Dow Jones (DJI: ^DJI), S&P 500 (NYSEArca: SPY - News) and Nasdaq (Nasdaq: ^IXIC) well over 50%.

As the chart above shows, buying on dips over the past few months has been as smart as selling into rallies after the October 2007 highs. But imagine if you would have continued to buy the dips during the post-2007 collapse. The results would be disastrous as every dip was followed by a lower dip and more losses.

Is a trend change near?

Today we find ourselves in a situation similar to the 2007 market top. Stocks have enjoyed an unprecedented rally, lead by financials, and the same yoyo's that didn't see the 2007 top or 2009 bottom, are still saying it's time to buy.

This begs the question though, if they weren't willing to buy earlier this year in March, why are they willing to buy today at a 60% premium. Even more importantly, will the market falter just as it did in 2007, when they told us to buy the last time?

A fractured market usually foreshadows an exhaustion of a broad trend. What is a fractured market? Let's consider a healthy market first. A healthy market is present when stocks of all sizes and sectors increase in price.

In an up-trending market, high beta sectors like small caps (NYSEArca: IWM - News) and the Nasdaq (Nasdaq: QQQQ - News) lead the way. Commonly, sectors that displayed leadership in the prior cycles join and even outperform high beta sectors. Since 2006, those leadership sectors include financials, real estate (NYSEArca: ICF - News) and banks.

Just as a sports team's success depends on the harmony between all individual players, the market's success depends on the strength of all sectors. A unanimous market is a healthy market, while a fractured market is a sick market.

Checking out early

Over the past few weeks we've seen weakness in the high beta and prior leadership sectors. Unlike the broad market, which peaked on October 19th, the SPDR KBW Bank ETF (NYSEArca: KBE - News), peaked five days earlier on October 14th and trades 12.85% below its recovery high, while the Dow Jones (NYSEArca: DIA - News) is within 1% of its recovery high.

The Financial Select Sector SPDR (NYSEArca: XLF - News) mirrors the performance of KBE and is 8.64% below its October 14th high. The iShares DJ US Real Estate ETF (NYSEArca: IYR - News) peaked even earlier (September 22nd) and is down 8.29% from its highs.

On a global scale, China's (NYSEArca: FXI - News) high octane, growth economy showed cracks even earlier. The Shanghai Composite has not been able to break above its August 5th high of 3,471 and is currently hovering around 3,170 (FXI, the China ETF does not reflect the exact performance of the Shanghai Composite).

More nails in the coffin

Selling by insiders, the people who should know, is out-stripping insider buying by 4x. This is in stark contrast to the March lows, when insiders were buying their companies stocks like hot cakes.

Savvy investors examining the stock market through a short-term lens will see a number of cracks in the foundation of this rally, serious cracks.

Even though this is good information to know and can protect against making stupid mistakes (such as jumping on the rally bandwagon), it doesn't really help you make money.

Understanding the bigger, long-term picture, on the other hand, will protect and grow portfolios. Metaphorically speaking, trusted long-term indicators will tell you if the light at the end of the tunnel is the exit or just another train.

At the end of the tunnel - light or another train?

Wall Street uses a myriad of indicators and corresponding interpretations to foretell the financial future. Ironically, the simple, common sense indicators that have graced Wall Street with their presence long before modern, high-tech computer models arrived, are largely ignored.

Over the past 100 years or so, we've seen major market bottoms in the 1930s, 1940s, 1950s, 1970s and 1980s. The common denominator between all lasting lows was a large-scale valuation reset. There always comes a point when investors are not willing to overpay for stocks. This causes a significant decline which results in fair values.

Common sense indicators, such as P/E ratios and dividend yields, measure a single company's, or the entire market's value in a manner that is easily understood by even novice investors.

Just recently, we've seen triple digit P/E ratios for the first time ever (based on actual reported earnings, not projections). This means that some company's stocks sell at over 100x their annual profit, while others aren't even profitable. Would you loan money to a company that may need - based on current numbers - 50, 60, 70 years or more, to pay back the original loan amount?

The lack of corporate profits is also reflected in tumbling dividend yields. Even though prices are still 30% below their 2007 highs, dividend yields have dropped. Falling prices usually translate into higher yields, not this time.

What the market bottoms over the past century had in common were extremely low P/E ratios and way above average dividend yields. In fact, no true bottom has occurred unless P/E ratios and dividend yields clocked in at levels indicative of rock-bottom valuations. This explains why the 2002 market bottom did not last and why the March 2009 bottom won't last.

The October issue of the ETF Profit Strategy Newsletter plots the historic performance of the stock market against P/E ratios, dividend yields and two other trusted indicators, along with target levels for the ultimate market bottom. A picture paints a thousand words and those charts speak volumes about the market's future.

Just as a small rudder can bank a ship, a small oversight can bankrupt a life worth of savings. Imagine you sold your holdings at or before October 2007. Imagine you'll get a chance to do it all over again, for better or for worse.