Trader’s Narrative

Almost a year ago I asked rhetorically, is the REIT bull market over? My own take on it at the time was that what we were seeing was yet another correction and not a top, as it actually turned out to be - in hindsight.

So where did I go wrong?

For starters, unlike the Canadian REITs (which I was also wrong on by the way) the US REIT index had an ominous head and shoulder formation. I downplayed this because of its “obviousness”.

But the head and shoulder pattern completed and price broke through the neckline. This same level corresponded to the bull market trendline. So because of this multiple significance it was important what price did near this level.

Back when I wrote about US REITs last, the breadth in the sector was really bad with only 20% or so above their 50 day moving average. This is a short term metric however and does not provide signposts for a longer term outlook. The REIT index did snap back sharply into June 2007. But from then on it was on a continuous and relentless decline.

The next rally created a lower high and the subsequent reaction a lower low. REITs were now in a clearly new market condition. As you can see from the chart, a bull market means that price stays well above its long term moving average. It only sporadically comes back to meet or pierce the 200 day moving average. The previous time that the REIT Index was “under water” this long was prior to the final base building in 2002-2003.

Trend Change or Correction
It is extremely difficult to pinpoint a major change in trend - at least I almost always find it extremely challenging. I have enough trouble with short to medium term inflection points. So I prefer to assume that there isn’t a major trend in store unless I’m proven wrong.

I prefer this not only because of the difficulty in separating a major trend change from a normal run of the mill correction but because the former only happens once in a blue moon while the latter occurs much more frequently. So I’m more than happy to take my chances because probability is on my side.

Powerless Fed
My other mistake was in attributing too much power to the Fed. I correctly thought they would soon start to lower interest rates. But my mistake was in thinking that this would be able to halt or reverse any weakness in the housing market. The rot in this sector was beyond the imagination of even the most die hard shorts.

What Now?
The only positive “spin” I can put on the abysmal REIT performance is that unlike most investments in the stock market, REITs are specifically built to be income vehicles. So while your holdings may be underwater, as an investor you are continuing to earn monthly or quarterly income from holding them. And depending on the particular REIT in question this can be a substantial amount. But this is only consolation for the long term investors, not the nimble short term traders.

Until we see the REIT Index (DJR) or the REIT iShares (IYR) or similar proxy carve out higher highs and higher lows, I can’t say it has flipped into bull mode. The disadvantage is that while by that time we may be confident, the inflection point will be far gone and with it, a good chunk of price performance.

While US REITs breached their long term (200 day) moving average in early May, the Canadian REITs have just breached their’s. They have been getting roughed up all this month. But the selling has reached a point which I think has washed out all the weak hands.

For starters, the S&P/TSX Capped REIT Index is now below its 200 day moving average. As it has for the duration of this bull market, this has been a good entry into the sector. See graph below for more details.

Also, the selloff has taken almost all REITs much lower. Had the fall in the index been attributed to one or two large capitalization REITs, I wouldn’t be as confident of a washout. But looking at the percentage above moving averages we see that the sector is deeply oversold. There are only around 16% above their short term (10 day) and their intermediate (50 day) moving averages; and only 40% are above their long term 200 day moving averages.

On June 26th 2006 when we last saw the REIT index dip below its long term moving average, there were 20% above their 50 day and 200 day moving averages with 47% above their 10 day moving average.

With the new uptick in rates in the US and chatter about the end of cheap money, we could be seeing a major trend change with REITs. But evenso, they aren’t going to go straight down. I think this technical oversold picture in the short term is still actionable.

There are two newsworthy events in the sector also. A new mini-REIT has been born: Charter (CRH.un) finished its conversion last month. And Sunrize (SRQ.un) was bought out by Ventas (VTR), a US REIT, so it is off the list.

Click to Enlarge Graph

Here is the new list of Canadian REITs:

Allied Properties (AP.un)
Artis REIT (AX.un) - previously Westfield
BTB REIT (BTB.un)
Boardwalk (BEI.un)

Calloway (CWT.un)
Canadian Apartment Properties (CAR.un)
Canadian Hotel Income Properties (HOT.un)
Canadian REIT (REF.un)
Charter (CRH.un)
Chartwell Seniors Housing (CSH.un)
Cominar (CUF.un)
Crombie (CRR.un)

Dundee (D.un)
Extendicare (EXE.un)
H&R REIT (HR.un)
Holloway Lodging (HLR.un)
Huntingdon (HNT.un)

IPC US (IUR.un)
InnVest (INN.un)
InterRent (IIP.un)

Lakeview (LHR.un)
Lanesborough (LRT.un)
Legacy Hotel (LGY.un)

Morguard (MRT.un)
Northern (NPR.un)
Primaris (PMZ.un)
Public Storage (PUB)

Retrocom (RMM.un)
RioCan (REI.un)
Royal Host (RYL.un)
Scott’s REIT (SRQ.un)
Temple REIT (TR.un)
Whiterock (WRK.un)

It’s been a while since I mentioned Canadian REITs so here’s a quick recap of what is going on in this sector of the Canadian markets. Eventhough this is a trading blog, I look at income investing once in a while because I think its smart to sweep your trading earnings into relatively safe investments which can earn you tax-advantaged passive income. And no current investment is more suited for that than REITs.

There have been a number of new developments. A slew of new REITs have come into the market: Temple, Scott’s, InterRent, BTB REIT and Westfield has continued to grow and been renamed Artis. Also Homburg bought Alexis Nihon last year. Retirement Residences and Summit were taken private and Legacy has put itself up for sale. Taking these into account, I’ve updated the list of Canadian REITs at the bottom of this post.

The last time I provided an overview of Canadian REITs, I mentioned that eventhough things looked bleak (with higher lows and lower lows) there was good reason to believe that would shake out weak hands and be followed by another upleg. I based this on the breadth numbers within the sector and also by looking at the bellwether component of the index, RioCan, which was near or at support.

Here’s what happened:

The green arrow is when I last posted. By the way, the spike down you see in November 2006 isn’t a bad tick - it was provoked by an about face by the federal government. Canadian REIT investors were reminded that no one lies better than a politician.

This chart illustrates what I was saying before about the Mexican market. Eventhough a well defined trend can be in effect, you have to enter intelligently. Otherwise you end up frustrated and watching from the sidelines once your stop loss is triggered. Everytime the REIT index has dipped below the 200 day moving average, it has been an excellent buying opportunity (for long term investors).

Breadth wise, the public real estate investment trust market is not that different from where it was the last time I looked at it: 39% above their short term 10 day moving average, 27% above their medium term 50 day moving average and finally 79% above their 200 day moving average. The high percentage above their long term MA gives me pause but it isn’t that uncommon in a strongly trending market. I think if you’re a long term holder, just sit tight. And if you’re on the sideline, wait for further pullback.

Here is the new list of Canadian REITs:

Allied Properties (AP.un)
Artis REIT (AX.un) - previously Westfield
BTB REIT (BTB.un)
Boardwalk (BEI.un)

Calloway (CWT.un)
Canadian Apartment Properties (CAR.un)
Canadian Hotel Income Properties (HOT.un)
Canadian REIT (REF.un)
Chartwell Seniors Housing (CSH.un)
Cominar (CUF.un)
Crombie (CRR.un)

Dundee (D.un)
Extendicare (EXE.un)
H&R REIT (HR.un)
Holloway Lodging (HLR.un)
Huntingdon (HNT.un)

IPC US (IUR.un)
InnVest (INN.un)
InterRent (IIP.un)

Lakeview (LHR.un)
Lanesborough (LRT.un)
Legacy Hotel (LGY.un)

Morguard (MRT.un)
Northern (NPR.un)
Primaris (PMZ.un)
Public Storage (PUB)

Retrocom (RMM.un)
RioCan (REI.un)
Royal Host (RYL.un)
Scott’s REIT (SRQ.un)
Sunrize (SZR.un)
Temple REIT (TR.un)
Whiterock (WRK.un)