Are You Kidding Me?

It was Sunday night, and I was sitting down to my usual routine of going through charts and e-mails to prepare for the next day. I had barely been logged on for two minutes when I got an e-mail alert – a news blurb that J.P. Morgan (JPM) was buying Bear Stearns (BSC) for $2 per share. BSC’s stock had closed at $30 on Friday. What a deal!

Then a second news alert hit my inbox. The Fed had just lowered the discount rate from 3.5 percent to 3.25 percent. Was the Fed trying to calm the market? You bet they were. When news of BSC being sold at such a discount hit the street, futures dropped as much as 38 points. After the Fed announcement, they were down only 22 points.

You never know when the market will make an unexpected major move, up or down. That’s why I recommend being somewhat balanced between bullish and bearish positions. It is also the reason why you should take profits off the table on portions of your trades. If you take, say, a 50 percent profit on a third of your position, you will have limited your potential loss without limiting your gain if the stock continues to rise.

Though it was Sunday night and the equity markets were closed, the news was coming fast and furious and money was being made and lost. Bear Stearns dropped from $30 to $3.18 in one move. There was nothing traders could do unless they were trading futures, because S&P futures markets open at 5:30 p.m. Eastern Time on Sundays. Equity traders and options traders had to wait until Monday’s opening bell to know their fate. But those who had balance in their portfolios and had been managing their trades with partial closeouts didn’t have much to worry about.

Remember the phone call that Gordon Gekko makes to Bud Fox in the movie Wall Street that starts out with “Money never sleeps, Buddy Boy.” No kidding.

[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick’s new investment service, he reveals how you can make hundreds – even thousands – of dollars just by playing a simple game of “guess the pattern.” Learn more here.]