Citigroup Inc. (NYSE:C) June SIGN study typically has generated several changes, especially in view of the market’s pullback over the past several weeks.  Indeed, lifting the weighting on one perceived yield sensitive group (REITs ) and lowering another (Telecommunications Services) may seem almost contradictory, while pulling down Transportation might suggest a less cyclical interest though an overweight stance on IT and Energy should undermine that argument.

Citigroup remain underweight on other cyclicals such as Autos, Retailing and Materials as shown in  Figure below.  As a consequence of the most recent changes, Citigroup is now overweight 38.0 percent of the S&P 500 (INDEXSP:.INX) and underweight 40.6 percent.


Citigroup Hanging Up on Telecom

Citigroup Inc. (NYSE:C)’s decision to lower the outlook for the Telecommunications Services sector to Underweight is being driven by two primary issues: seasonality in stock trading trends and a decline in earnings estimate revision momentum. Valuation is actually supportive for these stocks at present but Citigroup suspect that investors will not be convinced in an era where pricing power is challenged by technological change, as many have found ways to use the internet to connect to friends and loved ones, essentially making calls (and video calls) for free.  To be fair, the group has  underperformed thus far this year mostly in the last few months and the pattern may continue in the months ahead.


Getting Off Planes, Trains and Trucks

As per Citigroup year to date, the Transportation industry group has been a very solid outperformer, outpacing the S&P 500 (INDEXSP:.INX) since December 31, 2012, by almost 400 basis points, though it has been more of a market performer over the past three months.  Unfortunately, Citigroup Inc. (NYSE:C)’s proprietary lead indicator model, which encompasses 10 economic series that are highly correlated to future group stock price trends, now is suggesting meaningful underperformance in the coming year.  In addition, valuation work is not suggesting price gains either and the summer is not generally helpful for Transport stocks if trading history is any guide.  Hence, it is very difficult to even stay at a Market Weight posture and has compelled Citigroup to lower the stance to Underweight.


Raising up Real Estate

The REIT segment within the Financials sector is not particularly loved anymore due in part to the backup in Treasury yields but  the group can do well even if the spread between government bonds and REIT dividend yields favor bonds.  Thus, considering it as a buy or sell decision simply due to Treasuries is somewhat simplistic and does not even stand up under any real scrutiny. But, other factors such as seasonality matters for the group and investor sentiment is quite poor with one of the lowest percentage of buy ratings from the sell side analyst community of the 24 groups scrutinized.  Notably, if the economic environment is improving, investors get the cash flow benefits of the real estate sector but also can capture appreciation in the value of the properties.  Thus, the industry is a bit more faceted.


Citigroup Overweight stance for both Information Technology and Energy is reiterated

Lead  indicators, valuation and in some cases sentiment and earnings revision momentum augur well for the two sectors. As opposed to many commodities, energy prices have not  collapsed and thus do not appear to be as exposed to global economic direction thus adding appeal to the Energy sector.

Citigroup Various 2H13 concerns remain

The seemingly widespread desire to look for new market leadership in globally cyclical sensitive sectors may run headlong into continued weak  business  fundamentals  in  Europe,  more  economic  challenges  in  Brazil  and China, plus the reverberating impact of lower commodity prices in countries such as South Africa, Russia, Chile, Peru, Australia and Canada.   These conditions may weigh on  the  Street’s  2H13  S&P 500 (INDEXSP:.INX)  EPS  estimates  which  are  forecast  to  be  up  by  an unlikely double digit percentage year over year.

Furthermore, the ISM generally leads the performance of the Materials, Industrials and Energy sectors by three and six months, setting up for some price restraint over the next few months.  Thus, sector positioning becomes more mixed and an underweight posture remains in place for the Consumer  Discretionary  groups  alongside  Health  Care,  Materials,  and  Consumer Staples.