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Roaring Market, tired? REITs seem to be.

May 22, 2007
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The Market has been on an amazing tear lately. Big caps have clearly been leading the charge with the Dow and the SPX at record highs and showing no signs of weakness. The Nasdaq and Russell 2000, however have not been quite as hot. Both have spent time below their 20 MAs and the Russell has even plodded along its 50 MA still barely peeking above the peak before the late February sell off. In recent weeks they have consolidated and only in the past week made an effort to retake new highs, though not yet successful. It seems to me that the Dow and SPX are more than ripe for a pullback, but the Nasdaq and RUT may be ready for a breakout to further heights, finally joining in the exuberance. The question is, will the Nasdaq and RUT step it up to join the big caps surging higher or will they all succumb to the weight of a big caps correction? Whatever the case, the easiest first warning signal to watch for will be the 20 MA on the SPX. Until that is broken, there’s no reason to worry. After all, we use the charts to show is what IS happening, not what we think is going to happen, right? This is how we take the emotion and guesswork out of the equation.
(click imagine for bigger view)

One important factor as far as the Nasdaq is concerned will be the Sox, which seems to be at a make or break area. After breaking out of its previous range, it looks like old resistance became new support. So a bounce from this level would make a lot of sense. The inverted hammer yesterday(needs confirmation) lends support to that idea. Nevertheless, it isn’t a good sign that the Nasdaq was so strong and the SOX tried but then didn’t ultimately contribute to that gain. The bullish case for the SOX is further dimmed by a clear double top formation. If it does break back below this support area, the double top will be confirmed as a pattern and we would look to a target of about 470, right back where it was before breaking out of the symmetrical triangle.

If, by chance, the SOX does rally from here, I’d love to see VSEA break its pullback after not holding the level it gapped to. There are a few potential diagonal lines of support and a confirmed hammer a few days back. So it’s not out of the question, though there is still some room to go yet before completely filling the gap.

Oil stocks have been ripping lately. How about that SLB flag we discussed at the last meeting? I hope somebody took this trade. I didn’t because I was a bit scared by the upper shadows on the 14th and 15th. Would, coulda, shoulda….

I read a good article on the weakness of REITs.
Stocks Can’t Fall? Check Out REITs‘ Retreat.
It gives a good perspective to consider with respect to the strength of the current overall markets.
It is interesting too that the weakness of this group has all but been ignored in the recent market hysteria. People go straight to the homebuilders for weakness mentions, but this group’s weakness is more recent and may have only just begun. I can’t remember, but I think we may have looked at this chart at the last meeting. Regardless, there is a pretty clear head and shoulders pattern there. The long term trend line has not yet been broken, but it seems likely in the coming months to see continued weakness from this group. The Head and Shoulders pattern is said to be one of the most reliable reversal patterns. With a height of roughly 10 pts. on the IYR, an expected target would be around 72.50, coincidentally an old area of resistance.

Just for reference, here’s a sweet, year-long head and shoulders pattern on the Homebuilders. Actually, it’s kind of funny to look at the last 3 1/2 years as a giganto pattern with a neckline at 550. But I don’t think that one is going to pan out, because it would call for a target of Zero. We’d be in serious trouble! 🙂
Notice that the more recent peak of the homebuilders in February coincides with the all time peak of the REITS.

Anyway, the REITS do look weak, but not quite as gory as the homebuilders…..YET!
I don’t know what happened yesterday, but there was huge volume in the IYR was it bounced at both horizontal and diagonal support. So it looks like a bounce is likely, but I’ll be watching this group for short entries in the coming weeks if the market does ever run out of steam.

You can certainly search the Investools site for Real Estate stocks, but I went straight to the source to find out what is in this ETF. The Ishares page for the IYR holdings.
I went through a bunch of the top weighted stocks on that list. Many of them look ugly.
Here are some I think have fairly clear lines to watch, either for a support break or a resistance bounce.






It might seem foolish for spending all this time on bearish ideas when the market is ripping. But just as we should be looking for stocks with relative strength during a downtrend for when the market does turn upward, we should also be looking at relative weakness during a bull market for when the market turns over.
Happy hunting.

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