REIT’s and Utilities: Buy on weakness, or avoid?

During the summer of 2013, REIT’s as a sector fell on average by about 15% from their May highs. Some individual REIT’s fell substantially more than this, while a few fell less. Few, however, were spared from the negative implications of the Fed’s Taper Talk. The iShares Canadian S&P/TSX Capped REIT ETF illustrates the extent of this selloff. I’ve drawn a trendline on the chart illustrating how the uptrend, which began in 2009, was finally cracked that summer. Once broken, XRE fell from $17.50 to $14.50 rapidly. The 15% decline took less than 2 months to find support. Since hitting a bottom in July of 2013, the REIT sector, as illustrated by XRE, has been struggling to build a base. Shares have been finding technical resistance at just under $16, where sellers emerge with every short-lived rally. A series of rising troughs look to be creating an ascending triangle. This formation is a consolidation pattern that must be watched before acting upon. Should XRE fail to hold above $14.50, the sector may be in for more trouble. Similarly, should XRE break above $16/share, we might anticipate further upside. As we at ValueTrend like to point out to our clients, there must always be a catalyst in order for any stock consolidation pattern to break out. I see very little upside catalyst potentials for the REIT sector going forward, except perhaps a rally from an oversold level. However, I do see a potential catalyst for a breakdown out of the current consolidation pattern. That catalyst may be an eventual rising interest rate environment as the world’s largest bond purchaser (the US Federal Reserve) gradually reduces demand for treasury bonds. REIT’s (and trusts)  are, after all, an ownership of cash flow, rather than a true equity ownership. Thus, they can be similar to long bonds in some ways. Either way, the direction of a breakout by the REIT sector is unknown at this time. I might suggest that investors avoid the REIT sector until evidence of an upside breakout from the ascending triangle pattern occurs. That’s the safe way of playing it.

Utilities were also hit hard after the tapering announcement last summer. The BMO Utilities ETF ZUT-TSX fell from a high of $15.80 down to $13, or about 12%. The sector is experiencing a stronger comeback than the REIT’s lately. Canadian utilities were likely influenced by strength in the utilities sector in the US recently. Strong technical resistance comes into play on ZUT in or around $15 – $15.50. We held a position in this ETF and recently sold it, given its proximity to that price level. While perhaps not as vulnerable as the REIT sector, utilities do have a high level of sensitivity to interest rates due to their high dividend payouts, and sometimes-higher balance sheet leverage. My suggestion is to review your utility holdings for balance sheet strength and technical trading patterns. If any of your stocks have risen to prior technical resistance points, this may be an area where pricing may retreat again. I am inclined to avoid most utility stocks at this time.