Trader’s Narrative

I’m seeing a lot of attention directed towards the weakness ni the US REIT sector:

• the CBOE Dow Jones REIT Index (DJR) weak relative strength
• DJR formed a clear “head and shoulders” pattern
• the weakness in the real estate market in the US
• DJR just fell through long term support at the 200 day moving average

So the REITs are finished at this point, right?

Not quite.

At the bottom of the March 2007 low, I shared a study by Lowry’s which looked at percentage of stocks above their 10 day moving average. It was wildly bullish at a time when others were panicky and fearful. Like everything I’ve come to expect from Lowry’s, it was top notch analysis.

So lets take a page from their playbook and look at the REIT sector as defined by the CBOE Dow Jones REIT Index and see how many are above their 50 day and 200 day moving averages.

As of Friday last week, only 21% closed above its 50 day moving average and 45% above its 200 day moving average. That tells you things are very oversold in the short term and will probably bounce rather than keep going down.

Keep in mind that quite a few REITs in the index are only above their 50 day and 200 day moving averages because they are being bought out. For an example, see Eagle Hospitality Properties Trust Inc. (EHP). So realistically we are even more oversold than that measure shows.

The REIT sector broke out in the summer of 2003 and entered into an uptrending channel. It has stayed within that channel and everytime it has dipped below, it has been to trap more shorts and zoom higher (the yellow line is the 50 week moving average):

And about that ominous technical formation: when something is obvious to everyone, especially a well known pattern such as a “head and shoulders”, then it probably will not complete as expected. This reminds me of the massive head and shoulders formation on the S&P 500 index which formed in the summer of 2002 at the 950 area (neckline). Everyone and their uncle was expecting it to complete. Had it done so, it would have meant a measured move to 400 on the S&P 500 !!

Obviously, it didn’t. Instead, the market bottomed towards the end of that year and then started on its bull run, which is still ongoing. The market has a tendency to make mincemeat of those who think they’ve “figured it out”. Especially when what they’ve firgured out is blatantly obvious.

Finally, take a look at the 90 day T-Bill rate:

As I mentioned when I wrote about the yield curve flattening, we are seeing a topping formation which may be presaging a cut in Fed funds rates. If we do see a rate cut, that would, once again, breathe new life into the REITs bullish run.

Here are the top 10 REITs in the US - representing more than $136 Billion in capitalization:

Simon Property Group Inc. (SPG)
Vornado Realty Trust (VNO)
ProLogis (PLD)
Equity Residential (EQR)
General Growth Properties Inc. (GGP)
Boston Properties Inc. (BXP)
Host Hotels & Resorts Inc. (HST)
Archstone-Smith Trust (ASN)
Public Storage Inc. (PSA)
Kimco Realty Corp. (KIM)

There are also a few ETFs:

Real Estate iShares (IYR)
Vanguard REIT VIPERs (VNQ)
streetTRACKS Dow Jones Wilshire REIT Fund (RWR)