By Raghu Gullapalli, contributing SmartStops writer – originally posted at Minyanville
At around 3 pm yesterday afternoon, an hour before the close of equity trading the Fed announced a change to the swipe fees associated with debit card transactions. The Fed decided to reduce the rate for these swipe fees from 44 cents to 21 cents. This announcement triggered an extremely strong surge in the price of the credit card companies, namely, Visa (V) and Mastercard (MA)
No doubt some of you may scratch your head and wonder why a decrease in revenues is cause for excitement. Lets get in the Delorean and go back to December of 2010. At a meeting back then, the Fed had discussed decreasing the swipe fee to as low as 12 cents per debit card transaction. That piece of news caused a precipitous price decline.
In the months since December, Visa and Mastercard have regained their prior upward trend and closed the gap caused by that news.
Two of the fundamental rules of trading are
– Buy low and sell high
– Sell on excitement
I can assure you that many of my peers and several portfolio managers did just that. They saw Visa and MasterCard reach prices that they could only expect to attain under the very best bull market conditions. Especially MasterCard, which yesterday touched long-term resistance levels, last made when the stock made all time highs.
As you can see in the above chart, yesterday’s price action brought MasterCard (MA) close to all time highs.
The smart money started exiting these stocks after they had crossed the 10% threshold and are now waiting for a pullback to possibly reenter the trade.