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Greek Debt Steals Stock Spotlight: Focus on Position Size

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April 21, 2015
sinking fishing boat

Concerns about Greek debt are dominating financial headlines again. That means U.S. investor jitters are heating up as the cash-strapped nation’s pursuit of emergency funding poses a potential risk to global bond markets and to Europe’s hopes to pump up economic growth.

As traders dig in for days of uncertainty, they might take a harder look at their own position sizing or look to short-term volatility options.

Weekend talks in Washington, D.C., among global central bankers and finance ministers failed to deliver an emergency funding plan for the debt-ridden nation of Greece. The Greek government has warned it will run out of money this week and says it needs help with upcoming debt payments, including a payment of nearly 1 billion euros that’s due to the International Monetary Fund (IMF) by May 12.

Some investors fear the clock is ticking toward a potential Greek debt default, which could ultimately jettison the country from the shared-currency bloc. The potential move has even earned a nickname: "Grexit," meaning a Greek exit from the eurozone. Greece is meeting with its creditors April 24–25, but officials have already warned that a solution may not emerge at that time. At issue: Greece is resisting changes to its pension systems and payouts, which creditors say are necessary to reduce the country's debt and spur its economic growth.

Game of Chicken?

Although global equity markets registered hefty losses last week amid concerns about the Greek crisis, it’s possible the country is merely playing a dangerous game of chicken that may not last, says Peter Klink, director of modeling and market exposure at TD Ameritrade.

"It’s kind of like the boy who cried wolf. If they really were to leave the European Union, they would have no one to pay their bills. Who would pay their pensioners? They would have to start printing drachma. At the end of the day, I don't think Greece will leave. They will have no choice but to make an agreement," says Klink.

Flight to Safety Holds Down Rates

In the meantime, the uncertainty of the high-stakes Greek drama could result in an opposing force to the Federal Reserve's intention to hike interest rates this year.

"Interest rate markets overseas could be adversely affected, and the rest of the world is more attracted to U.S. interest rates because our bonds seem so much more stable," says JJ Kinahan, chief strategist at TD Ameritrade.

If flight-to-safety buying pours into the U.S. bond market, "the natural trading flows may be keeping rates low, despite the Fed's intention to raise rates," explains Kinahan. Bond prices and yields have an inverse relationship, which means that while bond prices fall, yields rise, and vice versa. A rush of safe-haven buying in 10-year and 30-year Treasuries, in particular, could help hold long-term rates down.

Keep Some Powder Dry

"In the short term, there could be some volatility. These are the times when you want to keep some cash on the sidelines so you might take advantage when something happens,” says Klink. 

For investors who are looking to play the Federal Reserve's shift toward higher rates this year, given the uncertainty surrounding the Greek crisis, the lesson is: "don't try and predict the bottom. To try and pick a date for a bottom is foolhardy. Very few people can do that all the time," says Kinahan. A better question to ask yourself: "Do you think this is a good price to buy or a good price to sell?"

Consider Your Allocation

Position sizing, influenced by account size, financial ability, and risk objectives, is also a key element of any trade (see figure 1 for a TD Ameritrade tool that can help with position sizing). "Most people's problem is that they trade too big and don't allow for price movement. Trade smaller and if something goes against you, make an adjustment," says Kinahan.

Also, Kinahan advises that investors scale into positions. If you are looking to purchase 10 contracts, for instance, instead of buying them all at once, consider buying three and if they move as you expected, maybe buy three more.

Bottom line, as Greece’s standoff with its creditors unfolds in the days ahead, volatility could heat up, and that puts increased importance on position sizing and researching potential short-term hedging.

Trade Architect’s Positions Component function

FIGURE 1: TRY THIS ON FOR SIZE. Monitor your position size via Trade Architect’s Positions Component function. Click on the Account tab and find positions in the pie button at the top right. For illustrative purposes only.

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