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Hedging Bank Stocks

Spain's troubled bank is finally good for something!


Video Transcript

Banco Santander (NYSE:SAN) is one of the largest banks in Spain, and they’ve been struggling with all of the problems in the Eurozone. They’re not managed very well, so it’s a pretty tough company and they’re not well prepared for any kind of financial disruption.

There are a couple of things in play here. While we don’t have earnings coming up quickly, what we’re really using Santander for is as a hedge against a long position in Goldman Sachs (NYSE:GS) but just in general to take advantage of if things get back in Europe; we would expect SAN to decline very quickly and it tends to do so. So, when things get back in Europe, Santander does really badly.

For example, we’ve recently talked about the iShares MSCI Italy ETF (NYSE:EWI) and the impact Italy’s issues could have on U.S. markets. On the chart in the video, I show you a recent slide in SAN from about $9 a share to about $5 a share, almost 50%, in two and a half months. Most of that happened between March and April 2012, so SAN really did start selling very quickly before we saw much of a reaction in U.S. stocks.

I got a question asking that now SAN’s below support what is our target for the stock? There are a couple levels that we’re evaluating as to where we think SAN might go. Now that it’s through the short-term horizontal support at about $6.85, that runs right through the consolidation in July, the gap in April and the bottom of the market in November, so we think SAN is clear from that point.

Now, it could go a lot lower, actually. Although I doubt we would ride it all the down in SlingShot Trader, I would be targeting the bottom of the market around $5.20 or $5.35. But I do think that’s a bit ambitious so here’s the way we would really evaluate it: We’ve got a counter-trend move in place that I’m measuring with the Finbonacci retracement.

On the chart in the video, I show you the exact levels, but essentially it puts the 161.8% retracement level right about $5.65. That’s about $1 lower than where it is now and a fairly large percentage. I would not expect that to be achieved overnight; it’s likely something that could take several days if not a couple of weeks to get there.

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.

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