Can you smell a little panic in the air?

On Thursday the S&P/ASX 200 index closed down 1.4% to the scarily-looking mark of 4,699.70.

Why is 4,699.70 scary?

I’m sure some technical analyst somewhere will say it has broken the 4,700 resistance level, and the next stop is 4,500.

Even scarier, as I’m writing this during the trading day on Friday, the S&P/ASX 200 trading at precisely 4,666.

666: the number of the beast

666: the low point of the S&P 500 in the U.S. in March last year.

Let the conspiracy theories abound…

Old school investing

In case you don’t already know, we’re not chartists here at The Motley Fool.

We come from the old school of investing. You know, the one where you buy shares when they are cheap, sell them when they’re expensive, and in between times just hold on for the ride?

That said, we are aware and conscious that the market goes through cycles.

We’ve had a virtually uninterrupted rising market since March 2009.

It has been 2 years of bull for investors who made it through the GFC. The ASX/S&P 200 has jumped 40%.

Some shares, like Riversdale Mining (ASX: RIV) and Extract Resources (ASX: EXT) have positively flown the coop, soaring 385% and 358% respectively over the same period. Happy days for shareholders of those two companies.

But the music has stopped…for the moment anyway.

A coming correction?

The Australian Financial Review recently quoted Peter Quinton of Bell Potter as saying…

If we are going to have a correction, the one sector that will cop it is resources.

They are the growth stocks par excellence. And I’ve got this impression within the investment community there is a building expectation that a 5 to 10 per cent correction in global share markets is coming.”

Maybe “the investment community” will be right, whoever they might be.

I suspect they are the high-flying, fast-living, super-traders from investment banks…the ones that typically ‘earn’ more in a year than many make in a lifetime.

Whoever they are, it won’t take much for some panicked short-term investors to lock in their profits and head for cover.

Suddenly, from nowhere, they remember the pain of the great stock market collapse of 2008. They remember they never want to go through such an experience again.

Get me out, NOW

So they sell. They sell regardless of price. Regardless of the value of the underlying company. They just want out, and they want out now.

As an example of how things can move quickly, over in the U.S. on Thursday evening the S&P 500 slumped 1.9%.

Suddenly, that 5% correction Mr Quinton was talking about above doesn’t seem so far away. It could come by the middle of next week.

It’s a salient reminder that the share market takes the stairs up but catches the lift down. The last few days, it has been going express from floors 72 to 34.

Ooh the uncertainty of it all…

There are so many uncertainties that it’s hard to want to bid up this market,” said James Paulsen of Wells Capital Management on Bloomberg.

I don’t think anyone is willing to commit large positions at this point. Investors will take a wait-and-see approach over the next week or two to rethink their strategy.” said Tommy Huie of M&I Investment Management also on Bloomberg.

So what are you to do?

It’s simple…

I repeat from above. Buy when shares are cheap, and sell when they are expensive. Do nothing in between.

And here’s the kicker…your decision making process should be the same whether the ASX/S&P 200 is at 6,000 or 4,666 or 3,333.

Happy investing.

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