Stocks skyrocketed yesterday. Today, the Dow has fallen below Monday’s close after soaring by as much as 400 points.

What are investors to make of this wild volatility?

Keith Fitz-Gerald in Money Morning says it’s too early to tell if the recent rally was the “real deal” or simply another “head fake” in a long string of downdrafts.

Keith says there are three key indicators you need to watch closely and three key ways to protect your portfolio in this bear market.

More from Money Morning:

• LIBOR is still near all-time highs. This continues to suggest that banks prefer not to lend to one another – even after the trillions of dollars in bailout-related investments that we’ve seen in the past 72 hours. In very plain English, this means that the banks still don’t trust each other and that they, above all others, are leery of the smoke-and–mirrors show that we all know as the “credit crisis.”

• The real economic growth rates in the financial sector are unclear. To say that it’s an accounting nightmare is an insult to the Hollywood honchos who actually make their living transforming nightmares into movies. Fiction writers could not concocted a better horror story than the one that’s rocked world financial markets since last November. Despite all the mergers and acquisitions, and the emergency bailouts, that we’ve seen to date, Wall Street hasn’t even begun to address the underlying business prospects – on anything more than a superficial level – of the lion’s share of the companies that are being bailed out. Unfortunately, that means that nothing’s been clarified – despite the trillions of dollars in handouts we’ve seen.

• The VIX Index. Generally regarded as a proxy for fear in the markets, the VIX Index continues to trade at historically unprecedented levels. Under normal conditions, that could be associated with a pending turnaround as investor “fear” climaxes. But these are hardly normal conditions. And that means that, coincidentally, the VIX may not have gone high enough for true, hair on fire capitulation. At least not yet.

Here’s what Keith says you should do now to protect your portfolio:

• Make sure your portfolio is concentrated in the stocks of stable, income generating companies – preferably companies with an international business exposure. It is clear that the United States economy will hurt for a long time to come, and exposure to the international markets offers investors the best lifeline.

• If you’ve been tempted to let go of your municipal bond-holdings, you may want to reconsider that move and hold on. If there’s one thing that’s clear about the bailout, it’s that virtually all of the government’s ammunition is being concentrated on the credit markets, of which municipal bonds are a substantial part. That means that we could see significant appreciation as these markets unlock. Many muni funds and exchange-traded funds (ETFs) are trading substantially below their net-asset values (NAVs) right now. But we suspect that won’t last for long as additional resources are brought to bear on the credit markets: The architects of these bailout plans want to unblock those markets like a plumber unblocks a drain.

• Under no circumstances should you abandon your carefully crafted defensive portfolio positions right now. There are simply too many unknowns to be able to say that we “know” the recovery is under way.

At the end of the day, whether there is a recovery or not is a moot point; history shows that the steepest correction eventually gives way to rallies.

Instead, the goal for every investor right now should be to maintain a defensive posture that does not dismantle your upside potential. The two – defense against the downside with an eye toward the upside – are not mutual exclusive.

Source: Special Credit Crisis Commentary: Don’t Let the Market Rally Steal Your Long-Term Profits