Bullish Divergence in Citigroup with a 7% Yield!
Thursday, December 27, 2007 | Chris RoweRating:
Ever since I wrote the article titled "Why Citigroup With an 8% Yield is a Bargain" two weeks ago, I've received lots of e-mails from people either agreeing that the stock is oversold (but still reluctant to buy) or completely disagreeing with me about the notion that we are looking at a good buy at this price with this dividend.First of all, I'd like to say that since practically all of you are pessimistic about the stock, that is actually a very big buy signal.
I hope this doesn't offend you, but almost any time that I find EVERY individual investor that I come in contact with disagreeing with me, I'm right. Is it frustrating to know that savvy investors actually take your collective opinion as a contrary signal? I think you're better off just embracing it.
But this isn't to talk about the fact that the individual investor is typically on the wrong side of the trade. It's not even an article talking about the 7% yield that Citigroup has assured investors will remain intact. It's an article about "bullish divergences".
Bullish divergences are (as you may have guessed) bullish signs, and they come in many forms. For instance, sector breadth indicators are showing that the bank sector is starting to move higher again (after being in historically oversold territory). Now, when breadth (internal) indicators are moving higher while the external market is moving lower, that's a bullish divergence. It's bullish because breadth (internal) indicators typically lead external markets.
Below is a chart of the Financial Select Sector SPDR Fund (XLF). It's basically the financial sector in the S&P500. It's an ETF which tracks the financial index, and is market-cap weighted, which just means that the stocks with the largest market-caps have the most influence on the index. So it's the financial part of the external market.
(Click on the image to enlarge it.)
You can see that the ETF is in a downtrend, and if you understand the fan principle, you may understand that the ETF appears to be attempting an upside reversal (but that's another story). One particular breadth indicator, "the percentage of stocks above their 30-week moving average," shows that the bank sector's breadth is turning positive. The "% 30-week" moved from 10% to 23% (which means that 13% of all stocks in the bank sector moved above their 30-week moving average). This is a bullish divergence.
You may also notice in the XLF chart that there are two indicators (MACD and RSI) below the actual trend chart. I won't get into the mechanics of these indicators here, but just understand that they are momentum indicators.
Both of these indicators are showing a positive divergence. When XLF made a lower low (from early to late November), the RSI did not. Instead, the RSI made double bottom (a second low at the exact same level as the first). This is one form of a bullish divergence. (Ideally, bullish divergences in momentum indicators show higher lows while the underlying stock or index shows lower lows.)
Then, you can see that the RSI made much higher lows while XLF showed almost the same low in mid-December as in late November ($28.24 and $28.60).
You can also see that the MACD made a significantly higher low in that same time frame.
Getting back to Citigroup...
Here we see an even more significant bullish divergence in both momentum indicators in the same time frame. I don't think that I have to tell you what they are. Just study the chart (if it's hard to read, just click on the image to enlarge it).
The bullish divergences are indicated by the green and blue lines: higher lows in the RSI and MACD with either even lows or lower lows in Citigroup (depending on which time frame you look at). This is a bullish sign.
Now, what I personally like to see before jumping in is a penetration of the recent resistance level of $35.00 on significant volume. But then again, I'm more of a short-intermediate-term options trader.
Longer-term investors should strongly consider jumping in before that happens because when the stock is above $35.00, you'll be looking at a 6% yield or maybe even a 5.5 - 5% yield. If you're still too afraid to jump in (like the rest of the herd), then take half here, and the other half if you are right and the stock does drop even further down. If the company follows through with what they said, and they don't eliminate the dividend, then on another sell-off you just may have a chance to buy this thing with an enormous dividend.
Oh, yeah, one more thing...
Like I said in the last Citigroup article that I wrote for you, once you have your foot in Citigroup, you can always sell covered calls against the stock. I'm telling you, whether it moves lower or higher, that would be AWESOME. (Options typically become more overpriced when stocks drop.)
It would be especially awesome if they follow through and keep the dividend. You'll have dividends deposited into your account, while at the same time, you'll be able to collect premiums every other month for writing call options against the position. If this stock trades up in the future, you'll be writing call options on a more expensive stock, thus receiving even higher premiums for the call options. So you may find yourself collecting 7% every other month on top of your 7% dividend.
If you're a bit more aggressive, and you're willing to own it on margin, then the dividend would essentially pay your margin interest, and you would collect twice as much every time you sold covered calls on the thing.
And what if the stock takes a "long time" to move higher? Oh no, whatever will we do?
I'll tell you what you'll do. You'll end up selling it at some point down the road with a long-term tax consequence and therefore you'll be able to keep a larger share of your profit. Remember Dylan's article yesterday, "How Taxes Kill Your Investment Returns"?
Until next Thursday!
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“Profit from the Trend”
Chris Rowe
Chief Investment Officer
The Trend Rider
