Thursday, June 24, 2010

Monday's "You Got Punked" Short Stop Losses

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Since the market had been gapping up and down so much the past 4-5 weeks, I decided a few weeks ago to go back to the old fashioned hedging and build up a portfolio of names on the short side of the book, to offset longs. Coming into the week I was net long, and said if the S&P 500 jumped over 1120 my stop losses would trigger on the short side and I'd be even more net long.  Which was fine by me as 1120 was the level I had been waiting for to get constructive again.

Not so fast!

We did get over 1120 Monday but it was illusionary - it was created by premarket magic when the S&P 500 immediately opened at S&P 1125 before a quick run to 1130 in the opening hours of the week.  From there it has been all down hill. 

I do like to review all trades after the fact to see what, if anything, should have been changed.  Sometimes the answer is nothing and the market just "gets" you - which is what happened this week.  My tight stop losses hit (as they should have) and 3 of my shorts were dumped in the opening hours. While I would not change the process (since all these stocks broke over resistance), in retrospect I got punked.  It happens.  I suffered losses of 2-5%, whereas in retrospect if not for the Chinese yuan announcement most likely these stocks would of not jumped like Mexican jumping beans and looking at them now I would have had very nice winners on 2 of the 3 positions.  The third, Discover Financial Services (DFS) had an earnings report last night so I would of been out of the position ahead of that since earnings risk is not my thing.

These 2 are carbon copies - you can see how I was fleeced Monday morning and since then all downhill.  CE especially hurt since my stop loss was for 2% and the stock gapped so strongly I got taken out at a 5% loss.



This 1 was an anomaly due to earnings; I don't take earnings risk from the long or short side 90% of the time so we'd have cleared deck ahead of the announcement.  Would have been a flattish trade.



Like I said, these things happen over the course of time - but when anyone says being short in a downturn is easy.... well, not so much.

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