After a monster rally, shares of Citigroup Inc (NYSE:C) finally ran into some stiff resistance post earnings. C stock actually opened higher following last Thursday’s earnings report, only to reverse course and close sharply lower on the day.
Friday saw even more selling as shares continued lower yet again. I think the intermediate-term top is in for Citigroup and look for the stock to head even lower over the coming weeks.
The latest earnings report from Citigroup was a beat on both the top- and bottom-lines. Earnings of $1.42 exceeded expectations of $1.32-per-share and revenues of $18.2 billion also beat estimates of $17.8 billion.
While all seemed good on the surface, a deeper drill down shows some serious weaknesses. Revenues did beat lowered estimates, but grew by only 2% year-over-year, while C stock has risen over 50% from a year ago.
Accordingly, the gain in Citigroup stock certainly outpaced growth by a wide margin. Trading revenues were down sharply once again, dropping 16%. The lack of volatility across all markets-equities, bonds and FX will continue to present a challenging trading environment.
C stock has been on of the biggest beneficiaries of the “Trump Bump”. After making a low of $47.70 right before the Presidential election last November, the stock had risen 53%, so a pullback of some magnitude was overdue.
The MACD had reached extreme readings before generating a sell signal crossover following last Thursday’s huge reversal.
Previous instances when the MACD reached an extreme and subsequently weakened have been a reliable indicator of further weakness on the horizon. A move back towards the trend line at the $68-level would appear likely.
Implied volatility (IV) is now at the lowest level of the year, as the current IV percentile of 0% will attest. Certainly, IV tends to drop following earnings, as the unknown becomes known. IV at the lowest level of the year, however, smacks of over-complacency, especially given that C stock had the worst two-day drubbing of the year.
Over-complacency is yet another hallmark of a top in the stock.
Click to EnlargeLow levels of implied volatility also mean option prices are cheap. So with Citigroup looking toppy and tired, a straight-forward put purchase makes sense.
Trade Idea for C Stock
Buy the C Nov $72.50 put at $1.90.
Maximum risk on the trade is the premium paid of a $190-per-put option. A move back towards the $68-trend-line by November expiration would result in a gain of over 100% on the option.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at [email protected]