It's my belief that trading and investing is, more than an intellectual discipline, an emotional discipline.

Therefore, I'm going to share the following self-analysis in the spirit of affecting positive change through financial understanding.

Description of the Trade that Failed

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After having correctly picked the bottom and having gotten fully invested on the long side in early March while the S&P was between 680 and 700, on April 15, I announced on Buzz & Banter that I'd decided to take profits on my entire long position. I did so with the S&P between 840 and 845.

I explained that I was expecting a dramatic increase in volatility accompanied by a correction of around 10% sometime between April 15 and May 15.

I developed a 4-part rationale for a correction:

1. Given that it was highly likely there'd be disappointments at some point during earning season, the probabilities of a correction were high. And given that companies that had recently exceeded expectations were being sold after their earnings announcements, probabilities of such a correction had increased.

2. The prospect for speculation surrounding the stress tests was a looming threat to the market.

3. I developed a somewhat esoteric theory that drew an inverse parallel between the extreme volatility between mid-October and mid-November of 2008 after a steep and steady fall, and what might be a similar explosion of volatility after a similarly steep and steady rise leading up to mid-April of 2009.

4. Some proprietary indicators of mine that had a very good recent track record were flashing sell signals.

Notwithstanding all of these rationales, on the very day I sold all of my long exposure, I expressed a strong doubt regarding my correction thesis: “I do have one major concern: Everybody and their grandmother is expecting a correction. So I very much doubt that it will occur in the manner that people expect.”

On Friday, April 17, I actually decided to establish a put position in XLF and SPX in anticipation of a sharp 1- to 2-day correction the following week. At the time I established these put positions, the S&P was at around 875.

The timing seemed perfect. The following Monday, April 20, the market corrected significantly to about the 832 level. As announced on the Buzz & Banter, I closed the put position Tuesday morning, April 21, when the market was in the 835 range. So far so good.

I announced in Buzz & Banter that I was expecting another assault on the highs and possibly a false break of the 875 level before the market finally made a 10% correction. The former was spot on. However, at this point, things started to go bad for this trade.

Beginning on April 23, I began to focus on risks related to the stress tests, and wrote an article on April 27 (Op-Ed: Back-Door Nationalization?) highlighting the severe dangers inherent in SCAP. I began accumulating some put positions in XLF on April 24 and continued through April 30, adding a VIX call position.