Consumers, Traders, and Credit Card Stocks

If taking on debt is a sign of confidence in the future, then recent stock market gains in credit card issuers may be another sign of better times to come.

As we move from a brief stop in the “Age of Austerity” to the perennial, but no less brief, “Age of Reelection”, there are any number of reasons to believe that the average American will find more money in his or her pocket this year. Sure, some of this will come from tax cuts and tax holidays, but much of that money will be in the form of plastic.

From Capital One (NYSE: COF) to MasterCard (NYSE: MA), the stocks of credit card issuers have been trading at their highest levels in months. Shares of Capital One bounced by more than 2% to again test new, 52-week highs. Up well over one and a half percent, shares of Discover Financial Services (NYSE: DFS) ended trading on Wednesday at new, yearly highs, breaking out to the upside above a short-term, six-day trading range. And although finishing slightly lower on the day, shares of Visa (NYSE: V) nonetheless continued their ascent, finishing near their highest levels in more than a year.

All four stocks have neutral ratings ahead of trading on Thursday. But to the extent that they continue to move toward and potentially cross into technically overbought territory, those ratings are vulnerable to a downgrade. In the case of Visa, where the stock’s ratings are at the lowest end of our “neutral” range, this vulnerability is especially acute relative to its peers. This is in large part due to the intermittent selling in MasterCard that has helped relieve overbought conditions in that stock of late. Both COF and DFS are less overbought than Visa, having only newly broken out into new highs territory.

Overbought conditions in these stocks is not necessarily a signal for selling the stocks short. Capital One, MasterCard, Visa and Discover Financial are all trading above their 200-day moving averages, which means that statistically speaking, the historical edges support trading from the long side, buying short-term weakness and selling strength, rather than trying to sell short strength in markets that are in established uptrends.

That said, of the four credit card stocks in today’s report, it is Capital One that has made the most recent arrival to bull market territory, only having traded consistently above the 200-day since the beginning of February.

Coming Spring 2012: the second edition of How Markets Really Work: A Quantitative Guide to Stock Market Behavior by Larry Connors and Cesar Alvarez. Click here to learn more.

David Penn is Editor in Chief of