Money Center Banks To Sell: Citibank And Wells Fargo

Summary

• Citibank and Wells Fargo have turned into chronic underperformers.
• April's momentum indicators do not show much positive change for investors.
• A retest of the March lows may be next. Plus, a sluggish reopening of the U.S. economy during the summer could be problematic for bank values.

I wrote a bullish note about a month ago on the three large banks with the best technical trading patterns. This article will highlight the weakest two of the big money center banks in America, namely Citibank (C) and Wells Fargo (WFC). I will focus my discussion on the subpar momentum trends of the two versus the blue-chip choices in the banking industry. An old Wall Street adage popularized by Ben Graham in the 1940s says, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Well, both the voting and weighing machines argue investors avoid these two banks, in favor of better positioned companies.

For starters, the two banks have lagged rather badly for years, in terms of stock performance for investors. Below are price charts from periods of three months to five years against the main diversified Financial Sector SPDR ETF (XLF), and leading competitors JPMorgan Chase (JPM), Bank of America (BAC) and Goldman Sachs (GS). Had you invested $10,000 in each, Citibank and Wells Fargo would have finished at the back of the pack.

April’s Weak Technical Momentum

Citibank and Wells Fargo have recovered nicely in price from their March lows. However, the bounce appears more a function of following the market, as opposed to a result of serious investor interest. Below I am charting some of my favorite momentum indicators for each on a 12-month scale.

I have circled in green the Relative Strength Index (RSI) has worked off the clearly oversold levels of March. Today’s reading around 50 indicates a normal momentum setting shorter term. The two have witnessed a sharp drop in the Negative Volume Index (NVI) during March-April, marked with red arrows. Despite the price upmove generally over the same span, a downtrending NVI is telling us few buyers have existed on falling volume days. In contrast, my early April story on the strongest mega-banks highlighted aggressive buying in JP Morgan, Bank of America and Goldman Sachs on slow volume days. The blue arrows point to weakening On Balance Volume (OBV) trends. The daily net price changes multiplied by volume totals show more sellers than buyers, despite the bounce higher in price since March.

It is entirely possible, the retracement upmoves ended this week for both Citibank and Wells Fargo. On the Citibank chart I circled the similar RSI setup in February. Since the two stocks did not recapture their simple 50-day moving averages, I believe a retest of the lows in March may be next. In addition, I cannot rule out a move to new multi-year lows during the summer, if the coronavirus infection numbers begin to rise from reopening the economy in May. A deeper and longer lasting recession will be very hard on confidence and valuations in the banking industry.

Summary

If you are down on the banking sector’s future, or looking to liquidate/short some financial exposure, I would start with Citibank and Wells Fargo. Both have outlined weak investor returns for several years. Current trading patterns and momentum indicators paint a bearish picture. Investors seem anxious to sell the two stocks during March and April, the opposite situation vs. strong buy patterns during the latest 30% bounce higher in the general market averages like the S&P 500.

Without doubt, the coronavirus pandemic recession is uniquely hard to predict and model for bank equity values. The Treasury and Federal Reserve are trying to offset wild gyrations in the bond and stock markets. They want to avoid a complete implosion in the economy, while encouraging a strong recovery after business shutdowns and quarantines end. If America gets a repeat Depression like the 1930s, it would wreak havoc with loan book values and spike defaults into record territory. Will government intervention succeed in calming the situation? If it fails (and it theoretically still could), owning any bank is truly risky business for investors.

Thanks for reading. Remember, if you decide to sell short securities, this borrowed position involves a greater degree of risk than simple long purchases. An investor can lose more than initially invested in short sales, so high levels of diversification are suggested. A variety of longs and shorts held together in a hedged portfolio design is the best way to lower the risk any single position will ruin your performance. I personally run long/short portfolios in regular taxable brokerage accounts. Pairing Citibank or Wells Fargo short as a small percentage position against other longs, especially in the financial sector will reduce your total risk in portfolio performance.

Please consider this article a first step in your research process, if interested in selling or shorting bank stocks. I hope my momentum discussion piques your interest, and more extensive research into the fundamental reasons why Citibank and Wells Fargo are not performing well should be your next step. As always, please consult with a registered and experienced investment advisor before making any trade.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in C, WFC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.