Short continued...

Briefly I have looked regarding hedge funds initiating short squeezes and as can be expected such things, while they do occur, do not make it on the cover of the New York Times. Still it is interesting that Jim Cramer, for whatever reason, has discussed the chicanery and games that hedge funds play in order to get the maximum edge.

If you haven't seen this I do highly encourage taking a glimpse...
http://www.usatoday.com/money/markets/2007-03-23-cramer-usat_N.htm

This does not mean that the big rally on Monday or other big rallies are necessarily due to market manipulation but I know that if I ran a big hedge fund and I had access to tremendous information on over-shorting I would have to consider ways of triggering short squeezes when the market got too oversold. Not because I am unethical but because the name of the game for these hedge fund managers, often under pressure of the firms or clients they work for, is to maximize profits at almost all costs. To play this game you have to at least consider what is really going on, not just what "should" be going on.

And so in sum...
I guess the point is... the same one that I have been saying for quite a long time now... and to be fair V. has been saying for longer... which is this:

Whether short or long in this market when the stock runs too much you gotta take profits. Period.

If you don't someone will take them from you. This may not mean selling all at once but it may mean taking profits on the way up. Also, if fear or greed gets excessive it is time to pull the trigger. When DUG moved up from 38 to 42 in one day(19th) after the fear of a "collapse in commodities" hit the markets and then shot up more to over 44 the next a.m. this was too much too fast. Fear had taken hold of those holding energy stocks and it was time to sell. I made a mistake here... I was in at 38 and watched it approach 44 with the idea that the bubble had burst and the DUG would shoot higher. One hour later the DUG was trading back around 42 and it wasn't until then that I sold my entire position. That was a mistake and I will not make it again. I needed to at least take some and perhaps take all profits at the "bump and run" in the DUG.

The typical "bump and run" with the long upward movement followed by excessive movement at the end occurred with CMED right before the last CC. I did take profits at 55 on CMED but the bump and run should have been a signal to sell at 57 and then watch out because only an impossible blow-out quarter, especially in this market, could have prevented a drop.

So that leads to the second point I have been making and need to follow always...
Doing nothing is OK. Cash is OK. It is all about looking for opportunities in the market and not forcing anything.

It took patience to wait for the TWM to get to 78, the QID to get to 48, and the DUG to get to 37.5. Those who did have been rewarded. It is also important to note that the downside risk goes down dramatically at these levels as compared to a TWM of 85, a QID of 55, a DUG of 42, etc. The up/down ratio is much higher. It just takes patience and that means holding back on activity. What if the indicators never reach this level? That is why I like to buy a little at higher levels (i.e. a little TWM at 84) but only a tiny bit with cash available for the real "opportunities".
If I get stopped out as I did with TWM it is a small size and is more than made up for with the larger position at the "opportunity" price.

Whether long or short, stocks, options, or other vehicles, patience, restraint, are worth it. Especially in this market. Define price targets that are stellar (as I said earlier TWM under 80, 78 is an optimal point) look at the charts, and define how much you are willing to lose by using stops and appropriate lot sizes so that the stops don't have to be too tight.

Since I was gone for the week I used small lot sizes on the TWM and DUG which allowed for a large range of error. I ultimately changed my stops for TWM to under 77 and for dUG to under 37 to help prevent pure market volatility from stopping me out of a good trade. I'm glad I did as my original position in DUG would have stopped out at 37.41. The small lot sizes allowed me to take on slightly more price fluctuation.

There is one more element that needs to be incorporated into my scheme and it is one that V. knows very well...

Market Sentiment....
It is important not only to know the numbers but to allow the market feeling to guide decisions. The best example of this was the DUG over 43 when it looked like the commodities bubble was going to burst and everything was going to come loose. At that point ration had left and at the very moment it looks like a stock can only go up may be the time when it can come back down hard and as a result it was time to at least take some and probably take substantial gains.

Always learning, always watching, always building upon past mistakes and achievements.

Best,
Jon