Please tell me that what is holding you back from buying REITs is a rising rate environment. Please oh please make that your excuse. Nothing would make me happier. I am constantly hearing from people who think theoretically and academically that rates are too low to be buying bonds and or anything that would benefit from lower rates. The more I hear these things from people who don’t put any money to work, the more I try and focus on what the actual market is doing in reality (which is where we live: in reality). The fed fund futures market has nailed this trade from the beginning as the theoreticians keep getting it wrong. Early in the year, (see here) relative breakouts in Utilities and REITs were agreeing with fed fund futures that rates were heading lower. Sure enough, not only did US Interest Rates get destroyed all year, but REITs and Utilities are each up 25% for 2014, more than doubling the returns of the S&P500. But now what? Why buy REITs up here?
Members of Eagle Bay Solutions have already been all over this trade, so make sure you are receiving these charts every week. Click here to register with us.
The first chart we are looking at shows the weekly candlesticks for $IYR, which is the exchange traded fund that tracks the Dow Jones U.S. Real Estate Index composed primarily of U.S. Real Estate Investment Trusts (or REITs). Look at prices not only holding on to the uptrend line from the 2011 lows, but over the past month have been breaking out to new highs with upside targets above $85 from a structural perspective. We arrive at this target based on the 161.8% Fibonacci extension from the 2013 decline. Also look at momentum working off this bearish divergence over time which cannot be more bullish. If we get a breakout in momentum above this downtrend line and RSI hits overbought conditions confirming what we are seeing in price, I think we can achieve our next upside targets a lot sooner than people think:
The best part about this trade is not that I like watching economists get it wrong or that I think the upside target is so far away from current prices. To me the most important thing that we can do as market participants is to manage risk. We are not sell side analysts, we are not journalists, we are not economists, we don’t have to “be right”. The only reason we are here is to try and make money. That’s it. So in order to make money consistently, we have to manage risk properly. In this case, we only want to be long REITs above the 2013 highs. Below that and we no longer want anything to do with it. There are no egos here. If prices fail and fall back below these key levels, then we’ll move on and go somewhere else. We have the luxury of being able to do that. Some others mentioned don’t have that ability. They have other factors that they need to consider.
The next chart is a relative one comparing the price of REITs to the S&P500. Look at this bottoming process over the past 18 months. We have already broken out above the downtrend line from early last year and all we are waiting for now is a breakout above the 2014 highs to confirm everything that we are seeing elsewhere.
Now, over the short-term I think we can see how important this key resistance really is. Here we are looking at a daily bar chart of REITs. We only want to be long above the 2013 highs, represented by the gray shaded area. Below that and there is nothing to talk about. Our upside target, based on this breakout is above 85 from the 161.8% Fibonacci extension from this entire bottoming process. Sure, can we go higher than that? Of course. But for now, this is out target and we will stick to that unless data comes in to suggest otherwise.
You guys know that I look at stocks, sectors, asset classes and really anything that trades liquid around the world. I am sitting here today telling you guys right now that there are very few things I see that present us with a better risk/reward opportunity. I don’t care if I’m right. I really don’t. That’s not what this is about. We are only here to try and make money. I spend my days searching far and wide for only the best risk/reward opportunities, and right now I think REITs are one of them. Money managers are not getting the yield they need out of the bond market, so they have to go into the stock market in order to get it. So for many reasons, I think they continue to pour money into this space.
Remember, long only above last year’s highs. Below that and there’s nothing to talk about.
Register here to receive weekly updates on these charts on multiple timeframes, with additional variables, pattern recognition, support and resistance levels, momentum analysis and up-to-date price projections.
Tags: $IYR $XLU $SPY $TNX