It means:
* To be excessively worried or panicked about something that is not actually a serious threat.
The idiom originates from the fable of "The Boy Who Cried Wolf." In this story, a shepherd boy repeatedly cries "Wolf!" to trick the villagers into coming to his aid. Eventually, when a wolf actually does appear, the villagers don't believe the boy, and the wolf eats the sheep. The moral of the story is that people should be cautious about believing every alarm and that overreacting can have negative consequences.
So, when someone says "the sky is falling down", they're exaggerating the severity of the situation, much like the boy who cried wolf.