The last article I wrote on Citigroup (C), I was of the opinion that its bullish ways were about to end. Because of this I suggested a short term income play for those who enjoy that type of trading. This is the original suggestion I made:
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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.
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When this article was written, the stock was trading at 35.89 and it did continue to move down to a low point of about '34' the beginning of December when I reversed my position on the stock. I owned the trade for two weeks before I made the reverse. I am surprised at the move of the stock into bullish territory again. Even though I made a profit, I expected a longer bearish trend.
Can Citigroup continue to move up? Here are the opinions of some analysts as of late."
JMP Securities upgraded from "Market Underperform" to "Market Perform.
Analysts at Sterne Agee upgraded shares of Citigroup from a neutral rating to a buy rating last Thursday. They now have a $50.00 price target on the stock. What is the company's reasoning behind this?
"The fourth quarter change in the CEO slot with the appointment of Michael Corbat is a game changer, in our view. The biggest risk at this point is the potential volatility tied to the Euro-zone-which appears to be stabilizing with the global liquidity stimulus and ongoing country-specific actions (Greek debt recently upgraded to B-/B from SD by S&P following a successful bond buyback)."
But Sterne Agee does throw out a caution. Shares with Citigroup and possibly the whole industry could prove quite volatile through the first half of the year. They are of the opinion that capital market-related revenue will perform in an "uninspired" manor because of the continued fiscal uncertainty coming from Washington. Separately, analysts at Credit Agricole reiterated an outperform rating on shares of Citigroup and have a $46.00 price target on the stock.
In 2013, investors will want to see Citigroup improving earnings as the company continues to focus on cutting annual expenses as it announced in early December. It plans is to cut expenses by $900 million this year and then $1.11 billion in all by 2014. At the same time the company plans on reducing spending through branch closings and layoffs, income is only projected to shrink by $300 million.
Long Term Investing in Citigroup
Citigroup may remain bullish for a time. The recent agreement on the fiscal cliff will benefit big banks. Newly reached fiscal cliff agreement has made it possible for US banks and other large cross-border companies to retain a key tax break covering billions of dollars in foreign income. The active-financing exception is the big ticket benefit for them. Morgan Stanley (MS), as an example, will be able to avoid a 35% U.S. corporate tax rate on interest income from money lent overseas. I am not sure how long the stock will remain bullish, but in the first half of 2013, I believe it would be prudent for investors to realize that the industry could be susceptible to market swings.
(click to enlarge)
Technically Speaking
Back in September and October, Citigroup signaled an over bought position twice in the RSI. Normally this is a sign a pullback is coming and it did happen the first of November. But this did not last long. By the first of December the stock started moving back up again. The dip did not move into bearish territory for long as the MACD points out. It looks like the end of part one of a longer bullish trend up. It is common for a stock to run strong, rest, and then move back into a bullish trend and it looks like that is what Citigroup may be doing. Having reached the top of the Bollinger bands again, I would not be surprised at a sideways movement on the stock. There still is a long term negative divergence happening in the RSI and a slight one in the MACD so I would not expect this upward movement to last much longer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
