Trader’s Narrative

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)

Moving averages are one of, if not, the first indicator that people are introduced to. They are simple to calculate, simple to understand and they seemingly smooth out the price on a chart, painting beautifully rounded hills and valleys. Most plot them right on the price chart and use them to show areas of support or resistance. See!, they say, price hit the 200 day moving average, that’s resistance!

Being a rebel, I use moving averages differently. First, I try to not plot them on top of my price charts since I prefer to keep the chart clean of any distractions. Price is the main feature and everything else keys off it. So why create distractions from the most important element?

Second, I refer to moving averages to find areas of extreme expansion. Think of price as an elastic band that can stretch above and below the moving average. As it does, it reaches a point where it just can’t stretch any further and starts to snap back. Mean reversion for the more mathematically inclined.

So what I do is modify the MACD to show this elastic character of prices. Moving Average Convergence Divergence (MACD) is probably the next most common indicator after moving averages. And yet most people have neither any understanding of how it is calculated nor how they should use it. To have the MACD indicator plot the movement of price away from a moving average change the default setting to: 1, X, 1 — where X stands for the period of the moving average you want.

Let me show you how I use this. I mentioned that I liked North West Company Fund (NWF.un) in June 2006 (note that in Sept 2006 there was a 3:1 split). Last year, the Canadian income trust market reacted with panic selling on Halloween as the Harper government reneged on their promise to not tax income trusts. Without any shame, they lied to the Canadian people. But what politician hasn’t?

North West wasn’t spared as it gapped down hard on very high volume. There was panic in the sector as the ground has suddenly shifted. Sentiment was very negative with many claiming this was the death knell for income trusts in general. I bought at $13.55 (all prices in Cdn dollars). That would be the green dot on the chart.

There was a momentary recovery and a second spike down. Such a move leads to a double bottom or a further decline - either way, a clear technical would tell me and I would limit any potential losses. It’s important to remember that North West’s business was humming along with great earnings. And I knew that I would be paid a distribution as I waited for cooler heads to prevail.

See the chart above the price chart for North West? That is the relative behavior of price to the 50 day simple moving average. By the way, there is nothing magical about the 50 moving average, it wouldn’t make a difference if you used the 33, 40, 43, etc. moving averages. Consistency is important though since we don’t want to compare apples to oranges.

Notice how the previous swing high in September 2006 was stopped as price was stretched to the upside (red rounded box). The November spike down was the mirror opposite of that situation. Of course, price simply can not bounce from one extreme (oversold) to the next extreme (overbought) within a short time. Especially when we’re dealing with a low beta security like an income trust. So I sat. And my sitting, as Jesse Livermore would say, made money. I got out a few days ago at $20.28 .

Here are the fills I got from Interactive Brokers:

NWF.UN 2006-11-13, 14:07:22 TSE 13.5500
NWF.UN 2007-04-30, 11:14:14 TSE 20.2800

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)