Rubber band theory is one of the most consistently reliable trading strategies on Wall Street. Quite simply, it says that regression to the mean is your safest bet. It works best with established large caps, since smaller growth companies are designed to deliver surprises in both directions. Small companies aiming for growth have no real mean, while the biggest, most stable ones tend to trade in a range for years or even decades. If they get too far from the mean, then trade in the opposite direction and you’re likely to have at least some decent gains.
But rubber band theory says more than just trade toward a regression to the mean. The image of a rubber band itself is of opposing forces stretching elastic in opposite directions. This is exactly what is happening now on a macro scale, and the band is being extremely stretched. Credit remains extremely loose globally, pulling the rubber band to one side, while stocks continue to tank all over the world, pulling it hard to the other side.
Besides hard numbers of the actual amount of dollars available, we have anecdotal evidence of loose liquidity from Super Bowl 50. Las Vegas recorded a record number of bets placed, which means people have more money to risk than ever before. Total bets peaked in 1998 and 2006, two years before two major stock market crashes. That’s not happening now. Money is cheap and getting cheaper.
That means there are a lot of brokerage accounts out there with lots of dry powder. It could soon be reinvested. Here are three stocks that could catapult higher once the opposing forces stretching this rubber band let go.
[recirclink id=313936]
American Express
Now the worst performing stock in the Dow 30, American Express Co. (NYSE: AXP) is reeling from Costco’s abandonment for its rival Visa. Look at a five-year chart of Amex and you’ll see, somewhat deceptively, that the stock has broken through 2012 levels. But look much farther back and it’s below even 2000 highs. Yes, Amex has had some trouble lately, but a 40% drop from 52-week highs is way overkill. The credit card company most notably has zero long-term debt, which will help it enormously when market interest rates start to rise in defiance of the Federal Reserve’s efforts to control them. Even assuming American Express is in its worst shape in 20 years, there just isn’t much more room for further decline.
Deutsche Bank
We’re already seeing a possible release on Germany’s Deutsche Bank A.G. (NYSE: DB), as the stock was up about 9% in Wedneday morning trading. While it is not unheard of for established bank stocks especially to crash, it is almost always preceded by a credit crunch. There is no credit crunch. At worst what there is, is an oil crunch, which will hurt banks to the extent that they made loans to the energy sector. But it won’t destroy them like an overall credit crunch does. Credit in Europe is still expanding at a 4.7% annual rate, according to the latest European Central Bank release, but Deutsche Bank is now below its 2008 low. Talk about a rubber band. This makes little sense, and may be explained by a horde of traders fearing a repeat of 2008 all at the same time. Animal spirits, as Keynes would say. It won’t last.
Credit Suisse
While Deutsche Bank is the epicenter of irrational selling in the banking sector presently, Credit Suisse Group A.G. (NYSE: CS) is right on its heels. Not only is the Swiss bank below its 2008 financial crisis lows, it’s below its 2002 bear market lows. While the oil crunch may have hurt the bank’s earnings considerably, the chances that the harm done has been worse than 2008 or 2002 is quite slim indeed. When sentiment flips, Credit Suisse could be a veritable sling shot.
Top Gaining Stocks
Top Losing Stocks