Yesterday saw the already large sell-off in global stocks, especially in the U.S. stock market, accelerate and continue. Looking at the S&P Index, we saw the price reach a low yesterday about 12% off the all-time high which was made only 1 week ago. This is a significant fall, wiping out all the gains made in 2018 already, which added up to a return greater than 8%! The price has been bouncing inconclusively for the past 12 hours at the time of writing. Of course, it is unclear what is going to happen next. Is this a healthy correction, or the start of something much worse? When it comes to stocks, these are the questions that life-changing fortunes are sometimes built on. The short answer is, we just don’t know yet, and the most intelligent thing to do, unless you are already getting killed from being over-extended in the bull market, is to wait and watch carefully without panic, or at most, to take a small long position.
One of the reasons why it is important to wait is the effect of a dramatic increase in volatility. Very high volatility, such as we just saw, usually leads to the price going backwards and forwards with dizzying speed and force. In this kind of environment, it is easy to panic and make a foolishly hasty decision. The problem with going long at this stage is that you will need a very large stop loss. If that is acceptable to you, then it is a good time to buy. Yet if you can wait until volatility decreases, and the swings play out, you could take a position with a significantly tighter stop loss, and hence make more profit on the resumption of a strong bull market, if it comes.