A Trader's Paradise
There has been a lot of noise about Citigroup (NYSE:C) since the financial crisis. The unprcedented 10-1 reverse stock split did not provide any silence. This split has been particularly difficult for the average investor to gauge. Putting on the binoculars, I can see bulls in the distance.
Since its low in early 2009, volume has performed in a manner unlike its historical average. Volume picked up during the recession while the price dropped. This was an expected outcome as sentiment was bearish on the markets, especially in the financial sector. Most investors flee after that large of a downtrend.
What is particularly strange is the amount of volume after it hit its low. The price hit resistance, and has been sideways ever since. What could explain a sideways security having such high volume?
Being priced so low, Citi has really been a trader's dream, especially for high frequency trading. This is a cost/benefit decision. Algorithms can make positive expected value trades while risking minimal capital. When the stock was trading at levels tenfold, risking the capital requirement was not favorable.
With the government’s stake in Citi, high frequency trading software was able to make sophisticated supply/demand models. The supply of Citi would stagnate its equilibrium. At the same time, traders were confident that Citi wouldn't be filing for bankruptcy considering the huge amount of government intervention. In short, a support and resistance range had fundamental transparency. These factors paved the way for algorithm heaven.
Since May 9th, when the reverse split occurred, there has been very low volume. Traders are searching for better risk/reward profiles as they have to risk 10x the capital again. Look for continued low volume until the big boys come in.
There has been speculation regarding the credibility of the May 9th reverse split. Some believe that it is a soft move, quoting studies with bearish results. A CNN Money article quoted a study performed by NYU and Emory business schools. The author wrote that 50% of the 1600 companies used in the study underperformed the broader market during the three year period after the reverse split. Normal distribution tends to fit this model as a bell shaped curve. A difficult part when modeling is understanding the correlation coefficient. Citi is one of the world’s largest banks. The average company is not.
To keep things in perspective, many large institutional buyers invest on fundamental and economic factors. Investors are much more patient then traders because their time horizon is much longer. Expect the large institutions to buy at a strategic time. This could be once they find a desirable price, or once the near term ex dates come to a close.
An Investor's Perspective
The intelligent investor defined by Ben Graham looks for bad sentiment, as it provides value buy situations. When looking at proper fundamentals, Citi is back in the black. Citi is now receiving revenues in over 150 contries. The dividend was raised to 1 cent, which has more significance than you would think. The beginning step to get shareholder value is back on track. Does the reverse split appear to be a move of desperation, or long term strategic planning?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.