Bottarelli Research has warned for weeks now that Spain represents far more risk than Greece did to American Banks.
Greece’s GDP is $301.08 billion. Greek public debt is about as hard to nail down as a blob of mercury, but I’ve read guesstimates of some $470.4 billion. Spain is the third largest economy in Europe after Germany and France (fourth if you include the United Kingdom). Its GDP is $1.41 trillion, and it’s debt might be as high as $1013.34 billion by autumn.
Last week, Standard & Poor’s downgraded Spain’s debt rating by two notches from A to BBB+. And today, Spain has officially conceded that their economy is in recession (joining the U.K. the Netherlands, Italy, Denmark, Belgium, Ireland, Portugal, Greece and Slovenia and the Czech Republic).
American banks are exposed to trillions in European debt. Some, like JP Morgan Chase (JPM – NYSE)’s Jamie Dimon, have bragged that they took advantage of Spain’s distress to buy up discounted assets. If Spain defaults, it will plow headlong into American banks’ balance sheets. The weakest banks and funds may even go belly up, much like Lehman Brothers did during the previous round of collapses back in 2008.
The technical chart for the Financial Select Sector SPDR (XLF – NYSE) – the ETF that tracks the major banking and trading players – reveals that investors have been quietly backing away from from this risk for weeks. Now, they’re prepared to accelerate the selling.
On the upper chart, we see the six-month rising trend broken. On the lower chart, we see Accumulation switch to distribution after RSI signaled that these shares were oversold. Finally MACD has completed some 48% of the final signal in the stack, a confirming Sellers Cross.
Our target prices for the XLF are:
- Probable: $14.07 (-8.58%)
- Reasonable: $13.45 (-12.81%)
- Possible: $12.83 (-16.63%)
Trading Tip: Investors should check your portfolio immediately for at-risk financial stocks. Traders should purchase put options against the sector’s weakest players.