Selling the Spit: My ‘Best’ Trade of 2007
My “best” trade this year was not a 10-bagger, or even a 2-bagger for that matter. To tell you the truth, the best trade I might have made this year did little more than breakeven.
I was long December calls in mid-November. I had just lost money on some calls that were vivisected earlier in the fall correction. I thought the market was simply experiencing typical autumn doldrums, so I took another small long position. A very small trade
— more to make a point to myself than to make money. Besides, I was very busy with my new job as senior editor at TradingMarkets.com, so I was writing much more than trading.
I rode the market down over the second half of November, ignoring the sky-fallin’, recession comin’ hysteria in the financial media (a media I confess to watching almost religiously). For me, fear has always seemed easier to read than greed. Also from my perspective
— and as we teach as part of risk control in our
TradingMarket’s Path to Professional Trading course
— fear is also easy to hedge against, most basically with proper position sizing. As the saying goes, never bet your lifestyle.
The market bottomed on Monday, November 26. After a bullish Black Friday, the traditional “first shopping day” of the winter holiday season, the sellers returned with a vengeance on so-called Cyber Monday. Cyber Monday is the day that online shoppers supposedly step-up their act. But the only thing that was selling big on Cyber Monday seemed to be stocks, as the market not only closed down for the day, but also took the Dow below the official this-is-a-correction line of 10%.
And then it stopped. For six out of the next eight days, the Dow moved higher
— almost straight up. By the ninth day of the rally, the Dow had gained 880 points.
What was the catalyst for this sudden shift in sentiment? Short-covering probably played a role, and I’m sure there were some bargain hunters, technical divergence players and mean reversion traders (see
“Path to Professional Trading” above) who took advantage of oversold markets with some timely long trades. But as the markets got moving to the upside, a new catalyst became clear: the Fed, and its dreamboat 50 basis point rate cut.
Only a month before, the markets had been in a funk due in part to the widespread belief that the Fed was less and less likely to lower interest rates. But as the markets moved higher, a willingness to reconsider in a speech by one Fed governor was allegedly magnified in a speech by Fed chairman Ben Bernanke days later.
Maybe it was a sign, gasped the financial media. A sign of rate cuts. And not just a regular rate cut, but 50 basis points worth of cuts. And discount rate cuts, too. And guidance. And a statement about doing more ââ”