Schaeffer's Trading Floor Blog

Sorting Through Citigroup's Mixed Indicators

What can Wall Street expect from C down the road?

by 10/17/2012 1:58 PM
Stocks quoted in this article:

The financial sector has been the top performing sector this year, up nearly 25% year-to-date, as measured by the Financial Select Sector SPDR (ETF) (NYSEARCA:XLF). On a shorter-term basis, it has also been outperforming since the Sept. 6 broad-market spike. Within this sector is financial services company Citigroup Inc. (NYSE:C), which has also been a solid performer this year, up nearly 44% year-to-date. More recently, on Oct. 15, C reported better-than-expected earnings of $1.06 per share, which beat estimates of $0.99. Revenues also rose 3% on a year-over-year basis. The shares reacted positively by adding nearly 5.5% that day.

This week has seen quite an increase in news flow for Citigroup. CEO Vikram Pandit stepped down, along with Chief Operating Officer John Havens. The initial reaction was negative, but C continues to jump to new multi-month highs today. Also, Citigroup saw a couple of conflicting analyst ratings. One brokerage firm issued an upgrade and a price-target hike while another maintained a "sell" rating on the shares. Meanwhile, Moody's changed its ratings outlook to "negative" from "stable." So, how is one supposed to analyze the situation with all of the conflicting information out there? Let's take a look at the technical and sentiment picture to try and reach a conclusion.

First, let's step back and look at the big picture, i.e. a monthly chart of Citigroup:

Monthly Chart of Citigroup (C) since 2000
Chart courtesy of StockCharts.com

C shares have been trading between $25 and $50 during the past four years. C presently finds itself range bound and smack dab in the middle of a long-term trading range. The 40-month moving average could also offer resistance at the moment.

Focusing in further, here is the technical picture of Citigroup on a daily basis:

Daily Chart of Citigroup (C) since February 2011
Chart courtesy of StockCharts.com

Shares have been on a tear since creating a double-bottom formation during the summer, up over 53%. Shares may stall at the current level, as this represents the 52-week high set back in March of this year. It would not be surprising to see some sort of consolidative action before attempting a successful breakout to new 52-week highs.

The sentiment picture is another factor used in analyzing the current situation in C. The following bullet points summarize this picture:

  • The option open interest configuration shows peak calls residing at the 40-strike, which may create a roadblock for any further upside action in shares.

  • Chart of Citigroup (C) Open Interest by Strike

  • The Schaeffer's put/call open interest ratio (SOIR) stands at 0.72, which ranks in the 26th percentile of its annual range. This shows that near-term option players have rarely been more call-heavy toward the stock during the past year.

  • Short interest has decreased by close to 21% during the most recent reporting period after matching its peak from September of last year. Currently, these shorted shares represent 1.8% of C's float. Based on the equity's average daily trading volume, it would take 1.5 days for all the shorts to cover their positions.

  • The 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio stands at 1.47, which is not showing any of the extreme behavior that may typically be found at tops or bottoms.

  • The analyst community is quite mixed on its recommendations, as 14 out of 22 rate the shares a buy, while three have issued "sell" suggestions. This mixed bag does not offer up any clues as to extremes on sentiment.

  • Options prices remain quite low as measured by implied volatility, which currently ranks in the 2nd percentile of all similar readings taken during the past year. There isn't much to read into this number, as one would expect implied volatilities to deflate after the latest earnings report.

Considering the above analysis, Citigroup may face a pause or consolidation over the next few weeks as it battles the March 52-week high, the peak call open interest from the November series, and an overbought situation as based on a current RSI reading of 74. One huge positive for C is that it belongs to the financial sector, which happens to be the hottest sector of the year so far. Try not to fight this sector. Strength begets strength.


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