REITs Should Lose Safe-Haven Status

According to conventional wisdom, demand for malls and office buildings will remain below supply, and with rents on the rise, real estate investment trusts, or REITs, should continue to be a solid investment choice.

However, you can't always trust conventional wisdom.

It's true that a slow and steady economy with relatively low long-term rates should help the performance of commercial real estate.

But a hard landing should slow demand and at least halt future price appreciation.

REITs are financed mostly through business loans by the major money-center banks. Like residential construction, the pipeline of new commercial construction has become speculative and financed with looser underwriting standards.

Given a hard landing for the U.S. economy, we should see weaker retail sales, lower mall traffic and contracting workforces, translating to less need for office space. Those factors would prove to be a drag on REITs.

In tracking this group, let's first look at the chart for StreetTRACKS DJ Wilshire REIT (RWR - commentary - Cramer's Take).

StreetTRACKS DJ Wilshire REIT Its weekly chart profile looks overbought

Click here for larger image.

Courtesy of Reuters

The RWR traded as high as $83.54 on Sept. 13. It has a weekly chart profile that looks overbought, with the five-week modified moving average at $80.20. If there's a weekly close below $80.20, I see risk to the 200-day simple moving average at $74.97. If REITs peak, the risk is to the 200-week SMA at $57.45.

If, like me, you're in the hard-landing camp, it may be time to book profits on REITs with a market capitalization above $10 billion if they have become overvalued fundamentally and overbought technically. My model shows a risky level near the REITs' 52-week high. I have found five names that meet this profile.

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As originally published, the column contained errors. Please see Corrections and Clarifications.

At the time of publication, Suttmeier had no positions in the stocks mentioned.

Richard Suttmeier is president of Global Market Consultants, Ltd., and chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in lower Manhattan. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.