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GETTING TECHNICAL
Rising Rates Be Damned: Real Estate Looks Good
Despite the specter of higher interest rates, real-estate-related stocks seem poised to notch more gains.
By MICHAEL KAHN
Feb. 15, 2017 4:21 p.m. ET
The markets never fail to amaze. Despite the Federal Reserve’s pledge to raise short-term rates this year and the bond market’s signals that higher long-term rates are likely, the normally rate-sensitive real estate sector seems to be flexing its muscles anyway. From real estate investment trusts (REITs) to services stocks to building suppliers, there is reason to be optimistic.

Let’s start with a long-term chart of the iShares Mortgage Real Estate Capped exchange-traded fund (ticker: REM). This ETF tracks the performance of U.S. REITs that hold U.S. residential and commercial mortgages.

A view that interest rates were going to move higher should at least have applied the brakes to any rally in this sector. But the trend since last October continues to be to the upside, and the long-term view shows prices now bumping up against a strong resistance ceiling that supported interim lows over the past few years — including the bottom of the 2008 financial crisis debacle (see Chart 1).

Chart 1
It’s not a perfect line. But when we are dealing with a resistance zone that proved important for the past eight years, we can give it a little latitude.

A move through that level above last week’s high would be a fairly good signal that the bulls are fully back in control. The short-term charts provide evidence to make this a good possibility, with rising moving averages providing support for the recent rally and technical indicators such as on-balance volume in rising trends of their own.

I wrote about REITs here in January, noting that although income-producing stocks were coming into favor, mortgage REITs did not have attractive charts. They look a lot better now.

The Vanguard REIT ETF (VNQ), which holds a more-diversified group of REITs in hotel, office, residential, and other areas, is also on the verge of an upside breakout, albeit one not as significant. Still, a short-term chart shows that a move through resistance could target last year’s highs and the double-digit percentage gains of the next few months (see Chart 2).

Chart 2
I like several hotel REITs, including LaSalle Hotel Properties (LHO), Ashford Hospitality Trust (AHT), and Chatham Lodging Trust (CLDT). Each is in a bullish-leaning, flag-like pattern with rising on-balance volume. As a bonus, they offer roughly 6% dividend yields.

Last week, real estate management and services stock CBRE Group (CBG) soared on a strong earnings report to confirm a major breakout to the upside. So far, it has held on to those gains, although now it looks a bit overbought in the short term.

CBRE peer Jones Lang LaSalle (JLL) also reported strong earnings this month, but it didn’t really make its strong breakout move until Tuesday (see Chart 3). It is now through resistance and its 50-day average and looks poised to reach the top of the 2016 trading range near $120 (the stock traded near $113 Wednesday afternoon).

Chart 3
That isn’t a very big move percentagewise. However, if it gets there, we can look for a serious upside breakout that could catapult it back to last year’s high near $180. That would be a significant gain and likely take many months to complete.

Finally, among home builders, the iShares U.S Home Construction ETF (ITB) is holding tough near major resistance at the top of a two-year range. Here, too, we see rising on-balance volume to suggest demand is still solid here.

There is a problem with the ETF itself, though, as it also tracks housing-related stocks such as retailer Home Depot (HD) and building-supplies maker Masco (MAS). Classifying Home Depot as a real estate stock is a bit of a stretch for me, but Masco makes the products that builders use and might appear on the shelves of the home-improvement retailer.

Masco is now in a three-month rally following its steep correction last year (see Chart 4). It is finally above its major moving averages and shows rising volume indicators. It even survived a huge selloff at the Feb. 9 open after missing on fourth-quarter profits but beating on revenues.

Chart 4
The fact that the market rejected the selloff is bullish. So is the chart, which shows a rising trend in place and an upside breakout through a rather solid level of resistance.

Real-estate-related stocks look surprisingly resilient in the face of interest rates that will eventually rise. That means investors have another sector to round out a portfolio that may have gotten bloated with the so-called Trump sectors of infrastructure, defense, and banks.

Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We’ll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.