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Is Pessimism Too Extreme Toward American Express Company?

A look at growing bearish sentiment toward a financial giant

by Jocelynn Drake (jdrake@sir-inc.com) 12/9/2008 1:55 PM


So far, 2008 has not been kind to financial giant American Express Company (AXP: View sentiment for AXPsentiment, chart, options), as the shares have retreated more than 54% since the start of the year, outpacing the S&P 500 Index's (SPX) loss of 38.7%. In fact, the security has been trapped in a steep downtrend under its 10-week and 20-week trendlines since July 2007, resulting in a loss of more than 63%. However, the security is currently in the process of bouncing back. The stock has conquered its 10-week trendline and has pegged its sights on its 20-week moving average, which is more than 14% above the shares.

WEEKLY CHART OF AXP SINCE MARCH 2007 WITH 10-WEEK AND 20-WEEK MOVING AVERAGES

What's more, the stock has rallied from its near-term low of $16.55 on November 21 and climbed above its 10-day and 20-day moving averages, pulling them into a bullish cross. This configuration signals that the shares' short-term trend has turned higher.

DAILY CHART OF AXP SINCE NOVEMBER 2008 WITH 10-DAY AND 20-DAY MOVING AVERAGES

News from AXP is giving the shares of Delta Air Lines (DAL: View sentiment for DALsentiment, chart, options) a boost today, even though it hasn't done much for AXP. The shares of American Express are down more than 1% this afternoon following news that Delta Air Lines will receive a $2-billion boost to its liquidity through 2010 by extending a co-branded credit card agreement with AXP. As part of the agreement, Delta said it expects an immediate $1-billion cash infusion from the sale of SkyMiles to American Express, followed by an additional $1 billion from contract improvements during the next 2 years.

In return, AXP will receive expanded travel-booking options for its customers and will be able to expand merchant acceptance of its brand throughout the Midwest.

In other news hitting the wires this afternoon, AXP's bank subsidiaries could issue up to $13.3 billion of debt under a U.S. government-backed program, which is $4.4 billion more than they originally thought they were eligible to issue. The company said on Monday it sold $5.5 billion in a 3-part debt deal that will be backed by the FDIC. American Express also said it has raised $4.6 billion through a retail certificate of deposit program. The proceeds will be used to pay its $3.6 billion of debt maturing in the fourth quarter of 2008.

A Pile of Pessimism

Despite the stock's recent rally attempts, investors remain skeptical of the shares. The Schaeffer's put/call open interest ratio for AXP stands at 1.38, as put open interest outweighs call open interest among near-term options. This reading is also higher than 98% of all those taken during the past year. In other words, short-term options speculators have been more pessimistically aligned toward the stock just 2% of the time during the past 52 weeks.

This preference for puts can also be seen in yesterday's option activity. The International Securities Exchange (ISE) reported that 1,467 puts were bought to open compared to 314 calls that were bought to open. In other words, 4.7 puts were purchased for every 1 call on the ISE.

Meanwhile, the Chicago Board Options Exchange (CBOE) reported a similar preference for puts. On Monday, 1,663 puts were purchased to open, while 330 calls were purchased, resulting in a put/call ratio of 5.04.

Wall Street is also skeptical of the shares. Zacks reports that the stock has earned 3 "buy" ratings, 7 "holds," and 5 "sell" ratings. This bearish configuration leaves ample room for potential upgrades, which could give the security a nice boost.

Overall, traders should keep a close watch on this security as it rallies above resistance at its 10-week trendline. A continuation of this trend could result in an unwinding of this pessimistic sentiment, sending the shares sharply higher.

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