Cramer's charts show top credit card companies benefiting from paper-to-plastic shift

Jim Cramer loves when strong, secular themes drive stocks. One of his favorites has been the shift from paper to plastic as credit cards increasingly dominate payments worldwide.

"As we move closer to a cashless society, I want to go off the charts with the help of Bob Lang. He's the founder of ExplosiveOptions.net as well as being the brilliant technician in the three-man, all-star team behind TheStreet.com's Trifecta Stocks newsletter," the "Mad Money" host said. "I want to get a better sense of what's happening with the four major credit card companies. Of course, we're talking about Visa, Mastercard, American Express, and Discover."

Cramer began with the daily chart of Visa, the largest credit card issuer of the four. Up nearly 30 percent so far in 2017, Visa is one of the Dow Jones Industrial average's top components, partially responsible for the average's recent 22,000 landmark, Cramer said.

Having hit an all-time high on Tuesday, Visa's stock has been notoriously tough to buy into at lower levels, Lang said.

"He notes that every time Visa's pulled back to its short-term 50-day moving average, that's the blue line, it's been an extraordinary buying opportunity," Cramer said.

Visa's rally can also be verified by the strong volume behind the move, Lang said. Big runs that happen on high volume rather than weak volume tend to be much more sustainable, he added.

"Put it all together and Lang thinks Visa's the best name in the group," Cramer said. "He wouldn't be surprised if the stock can climb up to $120 by the end of the year. That's up nearly 20 percent from these levels."

Mastercard has also been rallying healthily, Cramer said, turning to the second-largest credit card company's daily chart.

Lang pointed out that the moving average convergence divergence indicator, a tool that predicts upcoming changes in a stock's trajectory, is still in overbought territory, meaning Mastercard's shares may have run too far too quickly.

"Ideally, Lang would like to see Mastercard pull back to its 50-day moving average. That's been an excellent floor of support for the stock," Cramer said. "However, given that Mastercard's doing quite well and the company has a large, aggressive buyback, you might have to wait a long time for that kind of decline."

After years of disappointing investors and struggling to lift its stock, American Express has been on a tear since the company turned itself around in 2016, Cramer said.

Lang noticed what looked like a cup-and-handle pattern, when a stock gets sold off and then quickly bounces back before trading sideways for a while, forming in the card issuer's chart.

"This is one of the most reliably bullish chart formations around," Cramer said. "Now that American Express has broken out above $85, Lang is betting it could reach $100 very soon."

Finally, Cramer turned to the runt of the group, Discover Financial Services. Shares of Discover are down 14 percent year to date, and Lang does not expect the outlook to improve.

"After the stock's big breakdown in March, it's made a series of lower lows and low highs. That is not a good sign," Cramer said.

Since the beginning of the year, Discover has run into two possible ceilings of resistance at $64 and $66, and with so much going right in its rivals' stocks, it seems to hint at negative prospects.

"Here's the bottom line: The charts, as interpreted by Bob Lang, suggest that Visa, MasterCard and American Express will continue to be the big winners from one of my favorite themes, the gradual switch from paper to plastic," Cramer said. "But this is not a rising-tide-lifts-all-boats situation, because Discover's stock has been left behind and Lang doesn't see that changing any time soon."

Americans hold more credit-card debt than ever, and a 'major tipping point' isn't far off

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Credit-card debt in the US rose in June, surpassing the peak set just before the 2008 financial crisis.

Outstanding revolving credit, which includes credit-card debt, rose to $1.02 trillion in June, according to a monthly report from the Federal Reserve released Monday.

Missed debt payments have declined from the recession era, when several homes were foreclosed on because their owners got loans they wouldn't have qualified for with tighter rules.

But defaults are rising again for credit cards and auto loans. The New York Federal Reserve observed a 7.5% rise in the share of credit-card balances that were seriously delinquent, or at least 90 days past due, in the first quarter.

"We simply can't keep taking on credit card debt forever without it causing major problems," said Matt Schulz, the senior analyst at CreditCards.com. "This record probably won't be a major tipping point, but it likely isn't too far off."

Business Insider/Andy Kiersz, data from Bloomberg

Besides the New York Fed, several credit-card providers are reporting a rise in defaults. Synchrony Financial, one of the largest providers of store cards, said its provisions for loan losses — what it uses to cover for missed payments — jumped 30% year-on-year to $1.33 billion in the second quarter. That was partly because it lent out more dollars.

At American Express, loan loss provisions rose 26% from last year. And Capital One said its charge-off rate, or the share of balances it was unable to collect, rose to 5.1% in the second quarter from 4.07% a year earlier.

"It's worrisome that we are starting to see delinquency rates now begin to rise even with the unemployment rate at a cycle low," David Rosenberg, the chief economist at Gluskin Sheff, said in a note on Tuesday.

"This tells me that we are seeing escalating credit strains that have little to do just yet with a weakening economy — evidence that once again, very risky loans were extended this cycle to marginal if not sketchy borrowers."

Rosenberg said credit growth had run far in excess of work-based wage growth. And if banks tighten their lending standards, it could reduce the contribution that spending makes to economic growth.

"This record should serve as a wake-up call to Americans to focus on their credit card debt," Schulz said.

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