Hindsight is always 20/20 and I could write about the many technical signals and reasons behind the sell-off, but that would be disingenuous because there is no way anyone could have predicted when it was going to happen. So apart from offering sympathies to our colleagues in the the financial industry (who are getting worried about their year end bonuses), ordinary everyday traders should we be thinking about how to manage their portfolio.

Remember that volatility can throw a trader off his concentration and cause him to change his trading strategy. This is because deep down we are reactionary creatures and believe that different circumstances call for different solutions. This is not the case in trading. Trading rules must be developed, applied to, and make money in any market. One of the most important things we advise (and something I learnt from my CFA preparations) is that the main differences in portfolio performances is not the result of superior or inferior stock selection, but superior or inferior asset allocation (you can read more about this in the “Lessons on Investing” section of the blog). In short, always remember to have money aside because unlike in our shopping malls you will never know when the next bargain is going to come along. That means it’s either time to lighten you stock positions and take some money off the table (if you haven’t already) or start buying into some quality companies that have been getting whacked (if you are already fully in cash). This is what I call “positioning”.

Below you will see a chart which I think clearly describes why it might be difficult to see whether this is the start of a downturn or just a correction from a technical perspective. The uptrend is broken, but quite mildly and in the last week the bears were not out in force yet judging by the weak volume. However, this is clearly a market that is displaying weakness so act accordingly!