REITs Trade Has Durability
It's A Relative World: REITs Over Banks
What's The Event
This is a follow-up note to our recent publication "Bonds Beating Stocks Again" dated June 14, supporting the bond-proxies trade and REITs in particular. Numerically speaking, the sector has generated +6.3% (1-mth), +11.4% (3-mths), and +23% (YtD).
We like REITs because, our U.S. data-series backtest suggests that the REITs complex tends to benefit during periods in which the yield-curve is flattening (2004-2007, and 2011-2012), and it is our technical opinion that 10s-2s on the UST and CAD yield curves are currently flattening with visible continuation tendencies -- flattening to persist.
Additionally, from a more systematic perspective, CIBC TrendSpotting Matrix (TSM) has continued to assign better trend scores for the REITs index constituents relative to other members of the Financial GICS sector -- REITs are populating the right side of our TSM scoring histogram, in other words relative sector leadership.
When we measure breadth factors for the sector, we find more supportive evidence that the REITs trade should still have durability (albeit appearing near-term overbought) – breadth expansion in the complex has generated enough thrust to bring about incremental momentum and upside follow-through. The recent broadening of breadth and collective upside participation support what we believe is of technical thematic importance, with no visible developing divergences to alter us otherwise. Moneyflow and Volume factors are also exhibiting accumulation-like characteristics, hinting at investors' continued pent-up demand; in other words, support levels are likely to be met with more buy-pressure.
How should we fund the REITs trade?
It is our technical opinion that from a relative perspective, REITs are likely to continue to outperform over the banks. The ratio-chart (REITs/BANKs) shows better trending environment above the rising 100-d average with strong 3-, 9-, and 12-mth momentum readings, portending up-trend continuation – Favoring REITs exposure over Banks.
From a stock specific chart perspective, we continue to favor Milestone (MST.un) for its leadership characteristics, RioCan (REI.un) for its up-trend continuation along with market cap size and liquidity, followed by H&R (HR.un) and Killam (KMP.un) for their relative strength reacceleration.