I’ve had two separate requests for an analysis of the REIT sector in Canada. So I thought I’d cover it this week.
The weekly chart of the iShares REIT sector ETF below shows us a few things. First, the sector has come into some fairly strong support in and around $14.75/share. Another significant level of support lies at around $14.25. So there is a good chance that much of the current drawdown on the sector has been realized – and if not, the measured downside to these dominant support levels is reasonable.
We should also notice that the downtrend, which has been in place since early 2015 – is not officially over. Lower peaks prevail. Signs of basing are there, as seen by the double-bounce off of the aforementioned $14.75 support level, and by the (red) $15.50 /sh horizontal near-termed resistance point. The ETF remains below its key 200 day (40 week) MA and is – as is typical in a basing stock – meandering around its 10 week MA.
Below is a seasonal chart for the S&P/TSX real estate index, courtesy of www.equityclock.com. It appears to me that the seasonal entry point would be right about now for this sector. On the weekly chart above, I’ve marked with blue arrows the end of November low point that appears to reflect this seasonal entry point from Equity Clock’s analysis. It does look like, at least since 2011, this trade has worked.
How I would trade it
My strategy – should I wish to enter XRE – would be to buy after a 3-day break through $15.50. I would look to sell in the $16.75 area. You could collect the 5.5% yield on the ETF while you wait for that upside potential to materialize. Downside is likely contained to $14.75—although a worst case scenario might be $14.25.
So– downside risk to $14.75 support from an entry just over $15.50 (let’s say at $15.75) vs. the upside of $16.75. That means upside and downside potential are pretty close. Call it a buck risk vs. a buck reward potential. But there is that yield…
I don’t have a problem with the upside/downside and probable positive outcome of such a trade, but I probably won’t bother with it, given my models desire for higher profit potential.
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Keith, is there an entry point into Canadian banks?
Seasonality has ended according to Don Vialoux.
Hope the weather is good out there in Van–I visit my brother periodically on the North Shore – awesome area. Good coffee if you know where to look, too!
Anyhow – Don is right about the seasonal trends–but I view seasonal trends as a “background” –technicals come first. The downtrends ended for the group on the breakout in late October. My view is to hold the positions I own for a little while yet. My fundamental counterpart Craig Aucoin here at VT feels there are few places for the big CDN institutions to park their money and look good for year end–so with the banks starting to move he felt the institutions (mut funds) may need to buy the sector to say they are in it – not to mention that CDN fund managers have so few positive stocks and sectors to buy here now that resources are in the toilet–they have little choice but to move some capital into the banks at this time. So we view it technically favorable and fundamentally positive (decent earnings).
Hi Keith- Thanks for the insight into the REITs. What about the preferreds?
Specifically the rate resets? I realize the the Canada 5 year won’t be rising for a year or two or more, but will the (probable) US rate increase (or increases) move these shares back up in the near future? When do you see the Canada 5 year making an upward move
Randy we are neutral to bearish on the preferred space. We have a small weighting in our income platform – it was much higher earlier in the summer until we sold most of them. Canadian rates are not heading back soon–and most of these fixed reset pref’s are coming due to reset this and next year. US rates wont influence our rates for the time being.
Regarding your comment to Bob :
“Craig Aucoin feels there are few places for the big CDN institutions to park their money and look good for year end– not to mention that CDN fund managers have so few positive stocks and sectors to buy here– they have little choice but to move some capital into the banks at this time.”
Is this year-end window dressing by the funds, along with fear of the unknown effects of a Fed rate-hike, a strong factor in the current weakness seen in CDN reits? The weakness seems exaggerated, particularly since it doesn’t seem linked to one subsector / geographic area…
Yes–that exaggerated affect may induce a rally to the price point noted in the blog.
Ans yes–window dressing does happen in this industry–its a fact of life!