Schaeffer's Trading Floor Blog

Weekly Contrarian: Wall Street Sees Higher Highs for Citigroup Inc. (C)

C is facing off with former resistance, but could a lack of sideline cash hint at a bout of stagnation?

by 4/17/2013 11:35 AM
Stocks quoted in this article:

Although Citigroup Inc. (NYSE:C) reported stronger-than-expected earnings on Monday, this Yahoo! Finance article suggests "big banks can report almost anything they want depending on the assumptions they choose to make." What's more, the columnist says, "Citi has a long way to go before it can truly be considered a peer of the other financial survivors from the meltdown," pointing to JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group, Inc. (NYSE:GS).

Meanwhile, with Michael Corbat at the helm, it's difficult to say where the company is headed. According to the author, the relatively new CEO can go one of two ways: "break the company down and turn it into what amounts to the old Citibank," or maintain "the current model of trying to be everything to everyone." Against this backdrop, it's almost impossible to estimate valuation when the direction of Citigroup is anyone's guess.

Contrarian Perspective

The shares of Citigroup Inc. (NYSE:C) have embarked on a steady uptrend since mid-2012, nearly doubling atop their 10-week and 20-week moving averages. Now, the equity is struggling to surmount the $46-$48 neighborhood, which rejected C's rally attempts in mid-March.

From a sentiment standpoint, Wall Street has grown increasingly optimistic. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open almost two C calls for every put during the past two weeks. In fact, the stock's 10-day call/put volume ratio of 1.91 ranks in the 78th percentile of its annual range, implying that speculators are scooping up long calls at a faster-than-usual clip.

In the soon-to-expire April series of options, the overhead 47 strike is home to nearly 24,800 calls outstanding. Meanwhile, the May 46 strike harbors close to 14,500 open calls. In the short term, this abundance of bullish bets could exacerbate resistance for Citigroup.

While the aforementioned Yahoo! Finance columnist took Citi's earnings beat with a grain of salt, most analysts are extremely optimistic. In fact, 17 offer up "strong buy" endorsements, and another recommends the stock as a "buy." For comparison, three brokerage firms maintain middling "hold" ratings, while just two dole out "strong sells."

As contrarians, we like to see uptrending stocks surrounded by skepticism, as this often points to plenty of sideline cash to fuel further gains. While the shares of C have been impressive on the charts, it seems most of Wall Street is already in the bullish camp -- meaning there's little in the way of potential upgrades to lure more buyers to the bandwagon.


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