REITs Begin To Show Cracks

By: Chris Ciovacco | Thu, May 17, 2012
Print Email

In an a low interest rate environment, it was not surprising to see real estate investment trusts (REITs) move up in our ETF rankings over the past few months. Monitoring the health of market leaders is one way to monitor the health of the entire market. When market leaders begin to show cracks, it tends to be negative for the general market. Since our latest ETF rankings saw REITs drop five spots, we decided to take a closer look.

From a fundamental perspective, yield-chasing investors have pushed REIT valuations higher. In a May 15 MarketWatch article, Greg Brewer, executive director of research at Value Line, cautioned REIT investors:

The industry Brewer thinks is a trap for investors now is real estate investment trusts, which have been popular because so many people are seeking yield, but which Brewer said have been bid up way too far, making them a bad proposition right now. Equity Residential (EQR), Boston Properties (BXP), AvalonBay (AVB), BRE Properties (BRE)... it's not that these companies are bad companies - they're not - but they are pretty fully priced right now, and as an investor, I would be concerned that I am going to get in and I am going to get crushed.

On May 16, the REIT ETF (IYR) opened in positive territory, but experienced selling pressure for the rest of the day. IYR closed near the low of the session. The daily chart below shows the performance of REITs relative to the S&P 500. Point A highlights the intraday reversal that occurred relative to the S&P 500 on May 16. Near point B, MACD shows slowing momentum for REITs relative to the S&P 500. MACD will experience a "bearish cross" if the black line drops below the red line.

REITs realtive to S&P 500 - Daily

With loans difficult to obtain and the diminished appeal of owning a home, apartments have been in high demand. According to an April 27 Bloomberg story:

Real estate investors competing to buy Manhattan apartment buildings have sent prices to record highs as rental demand surges, reducing yields on the properties to the lowest in more than six years. The capitalization rate, a measure of investment return that declines as prices rise, averaged 4.4 percent for Manhattan multifamily buildings in the first three months of this year, the lowest since the third quarter of 2005, according to New York- based data firm Real Capital Analytics Inc.

IRY (Real Estate iShares) NYSE

The current daily chart of IYR below shows bearish divergences between two indicators, MACD and RSI, and price. A bearish divergence occurs when price makes a higher high, and the indicators fail to make a higher high. The divergences can be seen by comparing the slopes of lines A, B, and C. In this chart, MACD has already experienced a bearish cross (black below red below - see red arrow). The Relative strength Index (RSI) has also dropped below 50, which indicates the "bears are in control" (near orange arrow).

IRY (Real Estate iShares) NYSE

With the Fed promising to keep rates low for some time, REITs may continue to be market leaders. However, given the situation in Europe, stretched valuations, and the recent deterioration in the charts, REITS may not be immune to further weakness.

 


 

Chris Ciovacco

Author: Chris Ciovacco

Chris Ciovacco
Ciovacco Capital Management

Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE.

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. CCM helps individual investors and businesses, large & small; achieve improved investment results via research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions.

Copyright © 2006-2014 Chris Ciovacco

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/