Commercial REITS Equity: Caution Ahead
The commercial real estate stocks as represented by the Dow Jones U.S. Real Estate Index and the ETF IYR, were the rage last week.
From its low of $23.53 on Monday, IYR rallied as high as $29.41 on Friday, a 25% up move in just over four trading days.
Apart from the general bullishness in the market and the ETF was helped by some analyst upgrades following Kimco Realty Corporation’s (KIM) success in making a secondary equity offering which diluted the existing share holders by 25% at stock price last seen in the mid-90s. This led to a 9.1% up move in the MSCI US REIT Index (.RMZ) on Friday, which was matched by IYR’s 8.96% move up.
Price Action Perspective
Equity prices of commercial REITs have been under pressure as they deal with a credit market which does not have the appetite to refinance loans coming due over the next 12 months.
Equity prices have been under severe pressure with the IYR falling from a high of $94.99 in February 2007 to a low of $20.98 in early march a 78% fall in about two years. IYR traded as high $71 in the Fall of 2008 so the bulk of the fall happened in the last six months.
The IYR has rallied more than 40% from its early March low.
The price action in March has been choppy with large daily sw
ings.
The price movement has used technical price levels generated by Fibonacci Retracements and Extensions as support and resistance, indicating that this is still an instrument dominated by traders rather than traditional Buy Side Investors.
For example Friday’s high was around the $29.33 price level which represents the 50% retracement of 2009 Highs and Lows. The lows of last week of March ($23.53 on March 30 and $23.79 on March 25) were very close to $23.79 the 61.8% retracement from the early March lows ($20.98) to the mid March high ($28.33)
On Friday IYR broke through the March highs of $28.33 on good volume. This positive price action followed three days of green candles on rising volume.
Congestion Zone
Click For High Res Picture
The price of IYR is now approaching the congestion zone between $29 and $35 representing the price action in January. The underlying stocks of the IYR (NLY AVB BXP EQR HCP HCN PCL PSA SPG VNO KIM) have all rallied big with many of them reclaiming their 50 Day SMA.
However with a few exceptions, almost all the 50 Day SMAs are sloping downwards, with their 3 day RSI in heavy overbought areas. Typically this is a good short term sell signal.
Price Targets
Though there is a clear bullish bias in IYR it is ripe for a pull back. The companies in this sector face survival issues due to leverage and the credit freeze with many different loans under technical default.
The ZeroHedge blog has a series of articles covering this issue.
1. Wall Street Back To Its Criminal Ways
2. GGP Fails To Obtain Required Consents By Deadline
3. Simon Property Group Defaults On Mall Loan
On the other hand, we are in a massive bull run with the IYR breaking off above its March highs. There is a lot of short interest in these stocks and any rise in prices will squeeze the shorts further and increase the upward momentum.
There is some talk of Washington thinking of ways to help the CRE market.
Many big banks own debt backed by CRE and a major dislocation in that market can lead to systemic risk.
Purely based on technical levels, the upside price targets are: $29.70 (prior support) , $30.88 (100% Fibonacci Extension of the zig-zag in March), 31.30 (61.8% retracement of 2009 High-Low), and $33.13 (a measured move up of the box consolidation in March, and a prior swing high). On the downside the targets are $29.33 (50% retracement of 2009 High-Low), 28.33 (March High), $28.07 & $27.21 (61.8% & 50% Fibonacci Extension of the zig-zag in March respectively) and $27.36 (38.2% retracement of 2009 High-Low).
Disclosures: Vikram actively trades the securities mentioned including the IYR, URE and the SRS.