REITS FALL ON FEAR OF RISING RATES -- SMALL CAPS AND NASDAQ LOSE LEADERSHIP ROLE -- JANUARY IS A GOOD TIME TO RAISE CASH WHICH ISN'T TRASH ANYMORE
INDIVIDUAL REITS ARE FALLING ON VOLUME... Earlier today, I showed the Morgan Stanley REIT Index (RMS) and a leading REIT ETF breaking their 50-day day moving averages on rising volume. Here's a closer look at where most of the selling is coming from. The first three charts show the biggest REITs in the group. And all three are having bad chart days. Chart 1 shows that Equity Office Prop Trust has been falling all week on heavy volume. It's in danger of cracking its 200-day average. Equity Residential Prop Trust (Chart 2) is in danger of breaking its 50-day line. The big volume bars over the last week also show heavy selling. Chart 3 shows Simon Property slipping under its 50-day line on rising volume. The relative strength lines for all three REITs are rolling over. When a group that's been a market leader for the past few years suddenly starts to drop on heavy volume, it's time to reevaluate the entire group.
Chart 1
Chart 2
Chart 3
MONTHLY REIT CHART SHOWS NEGATIVE DIVERGENCE... The monthly bars in Chart 4 show the major bull market in REITs that started during 2000. Its relative strength also turned up during that year and has been rising since then. That made REITs a great investment during those five years -- both on an absolute and a relative basis. The question now is whether that five-year run is ending. I suspect that it is. Part of my concern comes from the 9-month RSI line. [I shorted the time span from 14 to 9 months to make it a little more sensitive]. First look at the RSI during 2000. It hit a bottom near 30 at the end of 1998 and another one near the end of 1999. The second trough (see green arrow) was higher than the first. At the same time, the REIT Index was hitting a new low at the end of 1999. That created a "positive divergence" between the rising RSI line and falling prices which preceded the bull trend. Right now, we have just the opposite. Throughout the five-year uptrend, each RSI peak has been higher than the preceding one -- up until now. Notice that the late 2004 RSI peak (see red arrow) is much lower than the early 2004 peak -- even though prices have reached a new high. That creates a "negative divergence" between a falling RSI line and rising prices. That's cause for concern and raises the question of whether it's time to start leaving the group. The fact that the RMS is backing off from its upper Bollinger also leaves it vulnerable to more selling.
Chart 4
WEEKLY CHART LOOKS TOPPY ... The weekly REIT chart looks even weaker than the monthly chart. The 9-week RSI line has already fallen to the lowest level more than six months (see red circle), and the weekly MACD lines are close to turning negative for the first time since last spring (see red arrows). The last MACD sell signal caused a drop to the lower Bollinger Band. That's 100 points from current levels (see blue arrows).
Chart 5
DAILY REIT CHART GIVES SELL SIGNAL ... With the monthly and weekly REIT charts looking toppy, we need to go to the more sensitive daily charts to see if any shorter-term sell signals are being given. And there are. The RMS is trading under its 50-day moving average for the first time in more than six months (see blue circle). That alone is reason enough to do some selling. The daily MACD lines are on a sell signal (see red circle). And, finally, the REIT/SPX ratio line appears to be peaking. In my view, it's time to start taking some profits in the REIT group. I suspect the recent selling has something to do with the threat of rising interest rates.
Chart 6
REITS BOTTOMED AS RATES PEAKED IN 2000... Historically, REITs have been closely tied to the direction of interest rates. The next two charts compare the direction of the MS REIT Index and the 10-year T-note yield. They show that they generally trend in opposite directions. Most notable is the fact that the 2000 bottom in REITs coincided exactly with a major peak in yields (see green circles). As a rule, falling long-term rates are bullish for REITs (and the entire housing sector). Rising rates are potentially bad. Which brings us to the last year. During the first half of 2004, the 10-year T-note yield broke its four-year down trendline. If that's an early sign that long-term rates are troughing, that would explain all the negative divergences on the REIT monthly and weekly charts. Let's examine what REITs did during the spring of last year when yields jumped.
Chart 7
Chart 8
REITS FELL WHEN RATES SPIKED LAST SPRING ... The last two charts compare the last year's trends for the MS REIT Index (Chart 9) and the 10-year T-note yield (Chart 10). When rates spiked up from March to May, REITs tumbled (compare the arrows). When rates peaked during June, REITs began another upleg (see arrows). Those who don't believe that REITs are vulnerable to the threat of rising rates might want to consider the dress rehearsal that took place last spring when rates started to rise and REITs fell. Which brings us to the present. The December trough in rates was higher than its late October trough in the first tangible sign that rates might be turning higher (see arrows). The two last down arrows on the REIT Index followed the two troughs in rates. Interestingly, the RMS/S&P ratio line peaked during November just as rates started to rise. That tells me that the threat of rising rates is starting to take a toll on REITs. Yesterday's hawkish minutes from the last Fed meeting, which suggested that rates may need to rise much higher, may have been a catalyst in today's REIT selling. And if the rate-sensitive REIT market is a barometer of rising rates, that's not good for the rest of the market either.
Chart 9
Chart 10
SMALL CAPS AND NASDAQ ARE LOSING LEADERSHIP ... Small cap stocks led the market higher during the last year -- and especially during the fourth quarter rally. So far this week, small caps have fallen harder than large caps. That's not a good sign for either one. The Russell 2000 Small Cap Index has broken its 50-day average for the first time since August (Chart 11). Its falling relative strength line shows loss of small cap leadership. The Nasdaq 100 (QQQQ) has also closed below its 50-day line for the first time in fourth months. It's relative strength line is dropping as well against the S&P 500. That's not good for either one. These short-term breakdowns increase the odds that the market is peaking.
Chart 11
Chart 12
TIME TO RAISE SOME CASH ... If you've been reading my work, you'll know that I've been calling for the latest market rally to last into January which would complete the fifth and final upwave in the cyclical bull market that started in October 2002. I thought the rally would last well into the month before running into trouble. It appears the trouble has started sooner rather than later. Historically, January is one of the best months of the year to raise some cash. I'd suggest that it's time to start doing so. We keep hearing from Wall Street that investors need to keep money in stocks because there's nowhere else to go. That's true of bonds which would also suffer in a climate of rising rates. What about cash (or cash equivalents)? With the Fed having indicated its intention to keep raising short-term rates, T-bills and money market funds will benefit accordingly. The last chart shows an uptrend in "short-term" interest rates. Cash isn't trash anymore. In fact, cash appears to be in the early stages of its own bull market.
Chart 13
