REIT ROLE IN INTERMARKET PICTURE
REITS PEAKED LAST JULY... One of our members asked today about the technical situation on the REITs -- and their role in the intermarket picture. Chart 1 is a daily chart of Morgan Stanley REIT Index for the past year. The chart shows a "double top" forming during April and late June -- which signalled a top. The actual collapse took place during July. [Our July 10, 2002 update entitled "More Housing Problems" recommeded profit-taking in REITS when they fell under their 50-day average that day]. Since then, the RMS has been fluctuating in trendless fashion. However, the red 200-day average is now trending lower. The blue 50-day line is still below the 200-day line, which is also negative. And, the RMS is still beneath both moving average lines. Even so, the green relative strength line (under the chart) shows the REITS holding up very well against the S&P 500. On a relative performance basis, the RMS peaked in early October (when the market bottomed). It has been doing better than the market more recently -- as the market has been sagging. In our opinion, the overall chart looks neutral to us -- with a negative bias. The weekly chart also has a more negative look to it. Notice that the weekly MACD lines broke down in the middle of last year (see red circle). The rising relative strength line shows that the REITs bottomed, relative to the S&P 500, in the spring of 2000 when the rest of the market peaked.
Chart 1
Chart 2
REITS VS. THE NASDAQ... From an intermarket perspective, REITs usually have a negative correlation to the rest of the market -- especially technology. The next two charts demonstrate their inverse relationship. Throughout 1998 and 1999, REITs fell while the tech-dominated Nasdaq soared. In the spring of 2000, however, the bubble burst in the Nasdaq. That was the exact point when the REIT Index bottomed. For the next two years, the REITs rose while the Nasdaq fell. The REITs peaked last July -- right around the time that the Nasdaq started to stabilize. It seems fair to say that both have been in trading ranges since then. REITs benefit from a weaker stock market and lower interest rates -- which pretty much defines the market environment for the past three years.
Chart 3
Chart 4
ANOTHER DOWN DAY... Yesterday's modest bounce didn't carry over today. The Dow loss totally wiped out yesterday gain. Breadth continues very weak. All sectors lost ground today. Energy and health care lost the least, while technology and cyclicals lost the most. The Nasdaq was the day's weakest index, reflecting heavier selling in techology stocks. Bonds bounced today. The yield on the 10 year T-note failed a test of its 50-day moving average. Over the short run, that's good for bonds and bad for stocks. Not surprisingly, gold stocks eked out a small gain today. We don't see any signs of an imminent bottom in the market and expect the gradual erosion to continue.
Chart 5
Chart 6
