Wells Fargo: Is Removal of Asset Cap Enough to Ignite a Rally?

October 8

Personal finances guru Robert Kiyosaki’s main contribution was to educate the public about assets and liabilities. In the most simple terms, he says, an asset makes money for you, while a liability drains money from you. The same is also true for businesses. So a business can hardly grow without also being able to grow its assets. Unfortunately for Wells Fargo (NYSE:) investors, this is exactly the situation they’ve been in since 2016.

After the fake accounts scandal of 2016, Wells Fargo has been put under a $1.95T asset cap by US regulators. A bank’s main assets are the loans it lends out to borrowers, in order to earn interest income. And while competitors like J.P. Morgan (NYSE:) and Bank of America (NYSE:) have long surpassed the $3T asset mark, Wells Fargo has been forbidden from exceeding $1.95T for eight years now. This is the main reason why JPM and BAC stocks have tripled in price over those eight years, while WFC is trading at roughly the same level as in 2016.

There is light at the end of the tunnel, though. Two weeks ago, WFC sent a third-party review of its risk and control overhauls to the Federal Reserve as it seeks to finally remove the asset cap. The central bank has yet to decide on the matter, but hopes are high. The question is, would the lifting of the restriction be as bullish a signal as many believe? Judging by the Elliott Wave chart below, not necessarily and not right away.

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The weekly chart of Wells Fargo reveals the stock’s recovery from its pandemic low in 2020. So far, it is clearly a three-wave structure consisting of two five-wave impulses to the upside and an a-b-c correction in between. It allows for both a bullish and a bearish interpretation. It can be counted either as a simple A-B-C zigzag or as a sequence of first and second waves within a bigger uptrend.

Our job is not to guess which one it is, but to identify both scenarios’ future implications. For starters, they both lead us to expect a short-term rally to $65 in wave 5 of C/(1). And after that, since every impulse is followed by a correction, they both imply a pullback to the support of wave 4 near $50 a share. At that point the market will have a decision to make.

Is Wells Fargo stock going to head higher again in wave (3) or continue to decline in a much bigger selloff? The answer likely hinges on whether the US can avoid a recession in 2025. The point is that with or without the asset cap, Wells Fargo bulls are unlikely to go very far in the near future.

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