Markets General Sell-off
For some time, we have seen declining profits in the U.S. markets. Even though it may not be as fast as some other global regions, it is taking its toll on investor sentiment. EPS optimism is crumbling right in the midst of earnings season and this is a good reason we are seeing such a sell-off. And this could also have an adverse effect upon the financial markets and send Citigroup (C) down. This could explain some of the weakness we see in the charts.
Break Up Citigroup?
How significant is it when two pension groups (Benedictine Sisters of Mount St. Scholastica and the Afscme Employee Pension Plan) file a shareholder proposal asking Citigroup Inc. to explore a possible breakup? They want a shareholder vote that could force the board to form an independent committee to explore separation of one or more businesses." Here are a few of the reasons this may have caught flight:
- Citigroup's shares have consistently traded below book value since late 2008
- It failed the Federal Reserve's CCAR stress tests in March 2012
- Regulators continue to forbid it from returning significant capital to stockholders due to concerns over its financial stability.
Matthew Patsky, CEO of Trillium Asset Management who represents the two pension funds stated the following:
"Despite some positive steps taken since the start of the financial crisis, we believe Citigroup's progress toward simplifying and de-risking its business has been slow and incomplete. Citigroup boasts many attractive attributes, but remains burdened by excessive complexity, as well as the stigma and risks associated with being named a 'too big to fail' institution."
There appears to be a gap between what Citi says its assets are worth and what the market thinks its worth. And that gap is close to $50 billion according to Afscme Employee Pension chairman Lee Saunders.
Investing in Citigroup
I am of the opinion that a combination of the present selloff and structural challenge from two pension funds will not be good bullish catalysts. I am sensing weakening occurring in its present move and if you are a growth investor, then I am not sure this would be a good entry point for the stock. I would not be surprised by a turn around in direction. Citigroup is not the only stock showing weakness. J.P. Morgan (JPM) and Bank of American (BAC), two direct competitors are also showing signs of weakness in their upward movement.
Looks like Citigroup is backing off an unsuccessful attempt to push through about 38.7 with a double top. The first peak is a new high, but the RSI also showed it to be over bought. At this point the stock usually moved back. It followed suite and then in its attempt to move up again, it did not have as much strength and could not follow through. The weakness was verified as the stock's move down this time took it through middle Bollinger band for the first time in over 3 months. The MACD Histogram is also showing us an interesting pattern. The highs (above '0') are getting lower while the lows (below '0') are getting lower also. I believe this is possibly signaling weakness that supports the RSI signal. This would be weakness in the short term movement of the stock. I cannot say the stock is finished moving up. The bullish stepping pattern may continue, but this last sideways movement in this pattern is showing the greatest weakness yet.
The Options Play
The stock is presently trading at 35.89 and from my observations; I am looking for a move down. For this reason I will put together a bearish short term income play.
- Buy the January put with a strike of '36' (priced at $2.06)
- Sell the January put with a strike of '35' (priced at $1.62)
- Net Debit to Start: $0.44
- Maximum Profit: $0.56
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Play
- The markets are selling off and I expect it to continue.
- Pensions calling for a breakup won't bring a positive spin.
- Weakness in the stock's present movement.