Getting Caught Short: It Happens!

By Todd Harrison  FEB 03, 2012 9:20 AM

How to respond to adverse conditions

 


You wanna hear the definition of an awesome morning? 
 
While getting out of the shower, Jamie walked by and said, "Did you see that Jefferies cut Research in Motion (RIMM) from 'Hold' to 'Underperform,'---whatever that means?"  She heard the news on Bloomberg TV and felt compelled to share as she knows I've been involved in the name.

"Good," I responded, "I bought a placeholder back yesterday and I've been waiting for lower prices to add more exposure."  That's not post-rationalization; right or wrong, the goal in trading is to be in a position to use price to your advantage
 
I continued to get dressed—in a suit on a Friday, if you can believe that—walked through our apartment, kissed all the kids on their heads, grabbed my jacket and headed to MVHQ.  I knew the real news of the day had yet to arrive and I wanted to be planted in my seat when it did.

BOOM!  the change in non-farm payrolls exploded to 243,000 (vs. estimates of 140,000), the unemployment rate dropped from 8.5% to 8.3% and the pre-market futures exploded to the upside—which is awesome considering that last night I went home short for the first time this year, both in the S&P (under 1335) and the NDX (under NASDAQ COMP 2875).  Nothing like getting triple wishboned before the market even opens.

The reaction to the news is always more important than the news itself, and the reaction to the price action defines the result of the trade.  And while in the back of my head, I can't help thinking, "Market rallies end on good news, not bad," I have defined risk parameters and will adhere to them, should they trigger.  As we're apt to say, good traders know how to make money but great traders know how to take a loss.

Yes, I believe a tradable cusp is close although, as discussed, I'm typically early in these vibes
 
Still, no matter how strong your (or my) sense, discipline must always trump conviction when managing financial risk.  I noted my parameters above—S&P 1335 and NASDAQ 2875—and I will remain short until such time the market proves me wrong.  As always, we’ll be discussing these dynamics (and more) on our real-time Buzz & Banter application. You can take a free trial to the Buzz if you haven't before.  Even if you have previously had a trial or subscription and want to jump back on for a free peek, give us a call at 212-991-9357 and we'll hook it up.

Think positive; today's fun and games have only just begun!
 
R.P.

Twitter: @todd_harrison

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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