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Capital One, comes undone

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Consumer lender Capital One (NYSE:COF) $33.70 -33.39% leads the largest decliner list after being downgraded this morning by Salomon Smith Barney to "neutral" from "sell" Although Capital One (COF) reported earnings that beat estimates of $0.86 a share by 6-cents, the credit lender disclosed a memorandum of understanding with its regulators indicating that COF needs to improve its plicies/systems/controls.

Salomon says it finds "systems shortfalls" somewhat troubling and thinks required investments to correct the "shortfalls" may be significant.

While Capital One (COF) gave upward guidance for EPS growth for 2002 to 30% from previous 20% growth, driven by lower marketing costs, Salomon thinks that the risk of a debt rating downgrade is high, and new disclosure shows larger than expected (40%) of COF's portfolio is subprime.

Capital One Chart - $1 box

Shares of COF have plummeted past their bearish vertical count. Risk/reward for any bearish trader here is very difficult to assess, but bears will be doing some "hunting" in other credit lenders.

Other stock symbols in the group have ACF -10%, HI -9%, AXP -0.64%.

Of the stocks mentioned above, all of their p/f charts look bearish. However, American Express' (AXP) chart offers the bearish trader the best risk/reward should sector weakness continue and COF's potential problems become an industry concern.

American Express Chart - $1 box

Last week, or two weeks ago, I remember talking about AXP as a Dow component to monitor for potential strength. That was before the stock broke its bullish support trend at $34 and also gave a triple-bottom sell signal at $34. This is the only stock mentioned above that hasn't achieved/exceeded its bearish vertical count and bears may be looking to feed on AXP with a stop at $39, while targeting the September lows of $25 for now.

American Express (AXP) is expected to release its quarterly earnings on July 22nd, which puts the company in a "quiet period" currently. With today's "surprise" from COF, potential bulls in AXP may pull their bids before earnings until they get a good look at AXP's books on Monday.

Jeff Bailey
Senior Market Technician
Option Investor

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