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Crisis Moves to Hungary?

  
Analysis, Economy, Education
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Sovereign debt worries in Europe have been elevated for a couple of months now, and today Hungary moved into the crosshairs.  Sovereign debt default risk as measured by 5-year CDS prices has spiked for Hungary and the countries surrounding it today, but default risk for this region still remains well below levels seen in late 2008 and early 2009.  The first two charts below of 5-year CDS for Austria and Hungary since 2008 highlights this.  Greece and Portugal default risk remains elevated as well, but at the moment it is still down from its recent peaks.  France also remains elevated, but it is still below highs seen in early 2009.  The same can’t be said for Spain, however.  Spain default risk reached a new crisis high today, taking out levels seen prior to the trillion Euro bailout.  And Spain matters much more than Hungary.

FEAR

  
  Education
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Fear is not always a bad thing, though. In fact, for traders, feeling fear is not a problem, as long as they don’t panic and allow it to drive them out of or in to trades.

Among the fears traders face:

  • Not making enough money in these huge market moves
  • Missing out on big trades
  • Getting caught on the wrong side

At times like this, top traders see opportunity when others crawl into a hole because they are frozen by their fears.

Traders who keep their cool make money from the fear (i.e. shorting oil). Others keep their head and cut positions so they don’t get blown up (Greece and the ripple effect). Still others are waiting patiently for the moment to strike, like a sniper.

So how can all traders think like the top traders when it comes to fear?

  • Lay out the data and look at it from an objective point of view.
  • Pay attention to where the disconnects are because others are trading based on fear.
  • Keep positions smaller with wider stops; be ready to get bigger quickly the moment the uncertainty starts clears up, which it always does.
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