Citigroup Inc. (C) is set to report third quarter 2020 earnings in Tuesday's pre-market, with analysts expecting a profit of $0.85 per share on $17.12 billion in revenue. That would mark a 57% drop in earnings compared to the same quarter in 2019, highlighting headwinds that may continue well into 2021. Even so, economic activity ticked higher in the third quarter, with lower COVID infection numbers translating into greater mobility, faster reopenings, and potentially greater-than-expected profits.

Key Takeaways

  • Commercial banks have benefited from increased third quarter economic activity.
  • Citigroup stock sold off in September after a damaging media report and a revenue warning.
  • The stock has broken key support levels and could sell off to the March low.

Shares of the banking giant sold off in September after The Wall Street Journal reported the Citigroup could get reprimanded by U.S. regulators for "failing to improve its risk management systems." Executives warned about fixed income and equity revenue at the same time, with the catalysts shaving more than 20% off the stock's value in the subsequent two weeks. The stock has ticked higher since that time but hasn't recouped the majority of losses posted during that period.

U.S. commercial banks face the prospect of ultra-low interest rates that may continue for at least two or three more years if they follow the dovish formula outlined by Federal Reserve Chairman Jerome Powell. Banks have already faced years of low yields, making the sector one of the worst performers of the 11-year bull market. Taken together with the chronic lack of corporate investment, these shares have become unattractive compared to other financial stocks.

Wall Street consensus on Citigroup now stands at a "Moderate Buy" based upon thirteen "Buy," two "Hold," and two "Sell" recommendations. Price targets currently range from a low of $50 to a Street-high $100, while the stock is set to open Monday's session about $5 below the low target. This humble placement suggests that analysts have missed the mark by a wide margin, raising the odds for downgrades if earnings or guidance fail to meet expectations. 

Fixed income broadly refers to those types of investment securities that pay investors fixed interest or dividend payments until the security's maturity date. At maturity, investors are repaid the principal amount they had invested.

Citigroup Long-Term Chart (2007 – 2020)

Chart showing the share price performance of Citigroup Inc. (C)

The stock posted a reverse split-adjusted all-time high at $570 in 2007 and sold off, finding support in the single digits after the 2008 economic collapse. It bounced into the low $50s a few months later, marking a resistance level that contained upside progress until a breakout following the 2016 election. The rally stalled above $80 at the start of 2018, giving way to a selloff that tested the breakout level successfully at year end.

Price action spent all of 2019 ticking back to the prior high, ahead of a January 2020 breakout that failed one month later, reinforcing resistance. It broke support at the 2018 low during the downdraft into March, while a bounce into June mounted that barrier and reversed at the 200-day exponential moving average (EMA), which was broken on heavy volume in February. The stock settled at new support into September and broke down, raising the odds that it will eventually test March's deep low.

The on-balance volume (OBV) accumulation-distribution indicator held 2019 support after the first quarter selloff and bounced with price into June. It broke that level in September and has now slumped to a four-year low. This exodus suggests that price will follow after it works off short-term overbought readings, with short sellers likely to reload positions around the 50-day EMA near $47.50. It will now take a buying spike above the 2019 low to negate this bearish outlook.

Short selling is an investment or trading strategy that speculates on the decline in a stock or other securities price. It is an advanced strategy that should only be undertaken by experienced traders and investors.

The Bottom Line

Citigroup stock has underperformed badly in the third quarter and will need a strong earnings report and outlook to shake off renewed selling pressure.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.