Note To Self: Stay Hedged

This market climate has been extremely frustrating especially when attempting to go long. Any attempt at being long recently has ended up with an exit and a loss. I was long yesterday, too much so and didn't exactly like when we were testing the lows again. The bear trap was even more concerning when we dropped below 830 on the S&p. To my credit, I did not panic out at the lows, I had the mental fortitude to hold as I noticed there was not any extensive panic selling after stop losses got triggered. It could have also been stupidity to continue holding because I would have had to exit with greater losses. But we had a very large reversal and ended way up on the day. I took that opportunity to remove a lot of my long bias and bought some calls on the ultra short russell 2000 at the end of the day because it was at support and most stocks had rallied back to resistance levels and I assumed we could have profit taking.

This proved to be a good thing because today we gave back quite a bit of the previous rally and during the whole down turn I was making money on my calls. I am still frustrated because I took my hedge off, which worked out great until the last 30 mins of the day. I can't be too upset being down 2% when the market was down 4%, however had I just held my hedge I would have ended up 3% instead of down 2. Obviously hindsight is 20/20 and even if I thought we would give back some of the come back at the end of the day I would not have predicted giving it almost all back. My guess is margin clerks and hedge fund redemptions along with most people locking in some profit before the G20 all added to the accelerated decline into the close.

My thoughts are that until we finally see some improvement in the job market and consumer data I will not be without offsetting trades. I chose the russell today because I assumed if we continued rallying today the russell would not participate as much and if we sold off the russell would sell off more, which was correct. I think the name of the game going into the new year will be to sell the rallies and always have pair trades on. Right now I have to have the mind set of just surviving and not trying to make money because a lot of people are not surviving or making money, even the professionals.

Looking ahead I think once Obama names all his players and gets into office the market will like that certainty even if his policies will be unknown. I think there could be more pain to come after looking at action in goldman sachs and citigroup over the past week. I am surprised goldman has not said anything to address the decline. So far it's looking like shorting berkshire hathaway could be a good play with GS and GE both way down haha, jk.

Historically, the upcoming week is typically bullish for stocks going into thanksgiving. I am hoping so and plan on having my bullish bias into the end of the week then lightening it up and picking up some good looking bearish setups. The action right now is just unpredictable and it is very trying.

I plan on doing somewhat of a case study of previous price action. I want to see if there is any pattern in terms of time length or percent move over the indicies, for example if during a bear market do we have 5 down days for every 2 up days, or in a bull market 3 up days for every 1 down day, etc. This could be a useful way in trying to enhance gains and pick times to add or subtract from positions. Since GE said it's dividend is safe for 09 maybe I'll just let it all sit in that until after my CFA test and sell options against it. :-)