#5 JULY 11, 2011 SCHWARTZ’S DICTUM: WHEN MARKET LETS YOU OFF THE HOOK TOO EASILY, DON’T GET OUT

Marty Schwartz said that if you are really worried about a position and the market let’s you off the hook too easily, don’t get out. This market provided a perfect example. At the high in above chart, Nasdaq was close to the multiyear high. The big decline from this high was triggered by an extremely bearish employment report. The market, however, rebounded strongly on same day, recovering 75% of loss. The shrugging off of very bearish news and the strong close with price near high of move looked like extremely bullish price action (see Trade #4). I had expected the market to open higher on Sunday night/Monday and then see another leg up. At the time I was extremely short. After Friday’s price action, I was resigned to hedge a major portion of this position beginning Sunday night and into Monday. On Sunday night, however, although dreading the worst, the market actually traded down 15 points from the Friday close in first 10 minutes (first oval in chart). Recalling Schwart’z dictum, I only hedged a token 10% of my short. The market was much lower on Monday’s equity market opening (second oval) and continued sharply lower thereafter.