From the desk of Steve Strazza @Sstrazza
Thanks to everyone for participating in this week’s Mystery Chart. The vast majority of respondents were either sellers or wanted nothing to do with this messy mess of a chart. Some of our less risk-averse participants were willing to bet on a failed breakdown and buy a reversal back above the recent lows.
In our opinion, this is the definition of a structural downtrend and there is very little evidence to suggest that will change anytime soon. With that as our backdrop let’s discuss why this chart is on our radar right now.
This is a weekly line chart of Real Estate (IYR) vs the S&P 500 (SPY) looking back about 20-years.
A test of the record lows seems like a foregone conclusion if prices can’t reclaim the 0.27 level in the coming sessions. Long story short, if we’re below these prior lows, this isn’t a chart we’d be buying in either the short or long-term.
More importantly, what does this mean for Real Estate as a sector?
We’ve written a lot recently about defensive leadership coming off the March lows and how this does not bode well for stocks in general. We want to see risk-on sectors like Financials, Industrials and Discretionary lead in order to signal bullish risk-appetite for Equities. Yet we’ve seen the exact opposite as Utilities, Health Care and Staples (XLP) have been the strongest sectors since most stocks peaked about 3-months ago.
As JC pointed out in his post recently, Real Estate has definitely been one of the leaders off the March lows. But, when we dig deeper we find that this is more of a trash trade than anything else as the sector has actually been one of the laggards over longer timeframes. Fundamental analysts would be happy to give you a myriad of reasons for this underperformance, but we won’t go there because we can easily identify the weakness via price behavior.
So while we do believe the bounce is being led by many defensive sectors and that is not a positive for equities, we want to caution that Real Estate is no longer a part of this so-called “safety trade.”
With that said, there are certain subsectors within the space, such as data storage and cell-tower REITs which are actually some of the strongest areas of the market. I’m currently writing a post about these groups which our Premium Members will be able to read soon. Here is our All Star Charts Custom Cell-Tower REIT Index which we’ll discuss in more detail in the post.
Within striking distance of new record highs on both an absolute and relative basis… Unlike the Mystery Chart, this sure looks like something we want to be buying. How about you?