We’ve been holding a long position in Plus500 since early-2019 with a cost basis of 753 pence a share. The last time we wrote about it was in May, 2021. The stock was hovering around 1540 GBp and its Elliott Wave pattern suggested we should expect more upside going forward.
And despite taking more time that we thought it would, the stock kept rising, indeed. Last week, it touched 1947 GBp, up 26% since we last examined it. Given that the market averages are actually down over the same period, this is a pretty good result. It gets even better when you add the sizeable dividends the company paid out in the meantime.
Dark Clouds Gathering
However, no trend lasts forever. Regardless of how much we like this company and its competent management, the post-2019 rally in Plus500 stock seems to have ended. There are two reasons for our pessimism. The first one has to do with interest rates. The other is all about Elliott Wave analysis. Let’s start with the latter.
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The daily chart of Plus500 reveals its entire surge from the bottom at 397 GBp in April, 2019. It can easily be seen as a simple (a)-(b)-(c) zigzag correction. Wave (a) is a five-wave impulse pattern, labeled 1-through-5. Wave (b) is a triangle correction, marked a-b-c-d-e. And wave (c) looks like an ending diagonal, whose lower line has just been breached.
Triangles precede the final wave of the larger sequence. Here, the final wave is (c). It is an ending diagonal or, as it is called in conventional technical analysis, a wedge. This is a reversal pattern, which is a strong enough bearish signal in and of itself. Taken together, these two patterns are hard to ignore. If this count is correct, Plus500 stock can fall at least to the support of wave (b) near 1200 GBp. From the current level of 1800 GBp, that would be a 33% plunge.
Now, if Elliott Wave patterns are nothing more than scribbles on a chart to you, consider this:
Plus500 Has Yet to Feel the Brunt of Higher Interest Rates
The surge in inflation forced the Fed to sharply raise interest rates this year. Central banks in Europe are slowly but surely following suit. Higher interest rates make credit, and therefore money, more expensive. This means people have less spare cash to put in the markets. This decreases trading activity across the board, which is the bread and butter of trading platforms like Plus500.
The company doesn’t specify how higher interest rates may affect its business. Fortunately, Interactive Brokers, one of the biggest trading platform operators in the world, does. On page 37 of its 2021 annual report we read the following:
“As an indirect positive effect, we believe low and negative benchmark world interest rates have been a factor leading to the active trading we have experienced, as investors enter securities markets to achieve higher yields on their investments.”
In other words, low rates good, high rates bad. Higher interest rates translate into less trading on the company’s platforms, which leads to less fees for and lower revenues at the company. If it is true for Interactive Brokers, it must also be true for Plus500 and the others in the industry.
The company has little exposure to the United States and has been somewhat shielded from the impact of higher interest rates so far. But this might soon change as central banks in Europe – its biggest and most important market – begin to tighten as well.
Conclusion
Once the market overreacts to these issues, as it usually does, and the stock is left for dead, we’d be happy to pick up shares in this high-quality, financially strong and growing company again. Until then, we’ll watch Plus500 from a safe distance. In the meantime, there are 17 more positions left in our stock portfolio, which have yet to realize their full potential.
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