Continued Weakness In Credit Cards

By Joey Fundora | January 26, 2009 AAA

As the credit crisis has a stronghold on Wall Street and

Main Street

, many consumers are increasingly finding themselves locked out of financing options. The availability of credit is necessary for a healthy economy, but its abuse has been one of the main culprits for the recent proliferation of paper asset bubbles. For the past 20 years, the economy has been on a rollercoaster ride as consumers took advantage of low interest rates and inflated values of paper assets. Consumers cycled through internet stocks, home equity and commodities to artificially increase their wealth. Unfortunately, bubbles can not be sustained, and the underlying "paper" profits vanished for the majority of participants - vastly affecting the short- and long-term health of credit card market.

As the United States settles into a recession, credit has become increasingly difficult to acquire, and even consumers with worthy credit are unable to qualify for loans. The common view amongst the general population is that the current generation will shift towards a savings versus spending philosophy, as they look to ride out this economic wave.

Saving may not be easy, but it will be necessary as many consumers are finding their home equity lines frozen as the value of their homes drop. With the economy as weak as it is, consumers are also increasingly finding themselves out of work. As such, many are counter-intuitively resorting to using high-interest rate credit cards to pay for their necessities. While initially this may seem positive to credit card companies, it is quite possible that these distressed consumers will end up defaulting on their loans. Also affecting the credit companies is that healthy consumers will cut back on credit spending as the economy weakens, opting instead to save first. It is undeniable that something is spooking market participants, and most credit card companies at 52-week lows (with the threat of breaking even lower). (For more, see Take Control Of Your Credit Cards)

This break lower is important because many investors see the 52-week high or low as a major indicator that shows the annual health of the company in question. While some value investors may look to buy at these lows, often stocks will continue to head lower forming bottoming patterns. Let's take a closer look at a few of these companies.

Maxing Out Credit Card Companies
Visa Inc. (NYSE:V) was one of 2008's IPO darling stocks, and it quickly raced higher after debuting in late March. It started weakening towards the middle of the year and accelerated lower along with the markets in October. In November-December, it attempted to build a base under its IPO price, but instead it broke lower in late January. It is now near 52-week lows, and the MACD indicator is showing no signs of waning momentum.

American Express Co. (NYSE:AXP) is another credit card company at a 52-week low. It has lost more than half its value over the past few months, and recently broke from a consolidation pattern to possibly form a new, lower wave. The one positive is a divergence in the MACD indicator.

Capital One Financial Corp. (NYSE:COF) has been consistently trading lower over the past year. Notice on the chart below that every attempt at a consolidation has failed. The company recently fell off a cliff and finds itself at a 52-week low as well. This stock is severely oversold at this point, so patience is probably recommended. Any bounce into the prior consolidation is likely to fail.

Mastercard (NYSE:MA) has held up better than most of its peers, but is also close to a 52-week low. It is now trading near the bottom of a consolidation pattern. In addition, the MACD is showing some weakness, which could be foreshadowing a breakdown.

Market participants are showing a defined negativity for credit card companies with all of these stocks showing yearly lows. The question is whether the bad news has been priced in, or if market participants are preparing for a disaster in the credit card companies.

Are credit companies the next "shoe to drop", or were they unfairly sold down with the entire sector and, instead, hold great value? Let us know what you think at the Investopedia Community.

Charts created using www.stockcharts.com

The author does not hold a position in any of the companies mentioned above at the time of this writing.

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