What just happened? And what are you doing about it?

Global stock markets have experienced extreme levels of volatility over this past week, not seen since the events leading up to and contributing to the GFC in 2007 and 2008 – the CBOE Volatility Index (VIX) doubled in just 3 trading sessions! This was followed on Tuesday of this week by the greatest one day recovery rally ever seen on the ASX. The ASX 200 rallied 268 points or just over 7% off its intraday low, and after being down over 5.5% it closed up over 1.2% on the day. What a rollercoaster ride of fear, greed and every other emotion !

Typically, the broker talk and associated market noise, has headlines and newsletters sprouting that now is a “once in a lifetime opportunity to buy undervalued shares”, “brace yourself for a massive rally” and all the other attention grabbing headlines. Maybe yesterday was the bottom – maybe it wasn’t; maybe the market will rally – maybe it will keep going lower. My point is that NO-ONE really knows, and no-one can accurately predict what can and will happen in the markets. Sure, many will claim they did if the market does rally from here. But what if all the pundits who called last Wednesday and then Thursday as the low and “great buying days”, and then watched in horror as the market dropped another 500 – 640 points. I’m sure they won’t be crowing from the rooftops as it is a low probability that the market will retrace all of the fall in as short a time as the falls took to occur, i.e. they have to sit through a much longer period of pain to regain the losses. If ever if at some stage the pain becomes too great to wait and they sell.

My question to you is – do you know what to do in relation to your trading and investing activities during these volatile times? Whilst stories will abound about those that got wiped out and those that did make money by ‘catching a falling knife’, neither of these strategies leads to long term success in the markets nor the creation of wealth. Those with rules and a plan, know exactly what they are doing during times like these. Maybe their system has taken them out of the market and they are sitting on the sidelines with their money in cash. Maybe they have hedged their portfolio so that losses are offset by profits from their hedging activities. Maybe they have exposure to another one or even more low correlated strategies in other markets such as metals, grains or currencies to act as a hedge.

Equally as important is to know when you will re-engage the equities market when it does resume its upward trend. Rather than trying to jump in and pick the bottom and bounce around helplessly in the rising tide of volatility reacting to every news story and broker report, those with a plan REACT to market conditions when the time, in the time-frame in which they invest, is right and are able to re-engage the market with quiet confidence when the trigger signals them to do so. Those in control of their destiny should have reduced exposure by moving partly into cash or wholly into cash and are sitting out these wild days and waiting in the wings for a low risk market environment to re-emerge in which they can re-invest their capital in the markets according to THEIR rules, instead of playing the game by some-one else’s.

In order to do this, you need a trigger or some sort of market timing instrument that reacts not to the noise but to price action. The market trend is still down and it has been in a medium term down trend since the 6th of May 2011. Anyone taking ‘the punt’ by buying shares at the so called bottom could very well be left with burnt fingers? Or they could be heroes this time, but what about next time?

Last Wednesday when on SKY News, I was cautious about the Market volatility and events that were taking place. You can view last week’s SKY News footage below.

Double click inside the box or click PLAY below to view the footage.