Declines usually need a catalyst, and the catalyst impacting the REITs and other interest-sensitive sectors are rising rates. When interest rates go up, there is a negative impact on all groups and sectors.

We saw this last week, as rates surged and a general selloff took place from Tuesday through Thursday.

Expectations had been for rates to remain low or even to see the


lower rates. When this expectation was nullified, stocks were left to re-evaluate the situation and factor in the new information. Higher rates, or the potential for higher rates, mean lower stock prices, at least initially.

So far we have just seen a reaction to the idea or potential for higher rates. The absolute level of rates hasn't increased significantly yet. Yes, rates have risen to a nine-month high, and they're challenging the long-term downtrend, but the absolute level of interest rates remains relatively low.

REIT Sector Breadth

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The outlook for higher rates is most likely not an issue at the moment, but we don't want to miss a real change in long-term rates that will drain liquidity from the system and reverse the good fortunes of this market.

This has been a liquidity driven market -- aren't they always? -- and we would expect a continued rally in rates to have a material effect once the they have rallied enough to put the idea in traders' heads that the easy money environment has come to an end.

The two most sensitive groups to rising rates are utilities and REITs. The REIT sector has been a strong performing sector for the last three years, but this group had been showing signs of topping out, and the recent interest rate concerns have added to the selling pressure in these stocks.

Higher interest rates translate directly into higher operating expenses for these companies. The cost associated with financing becomes more expensive. The breadth line for this sector has been turning down, suggesting that liquidity is leaving the sector. This tells us that the group should be avoided at this point.

We are highlighting one REIT in the office space and one in the retail space as representative examples of stocks to avoid. These two subsectors are most impacted by rising rates.

Boston Properties

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Boston Properties

(BXP) - Get Report

is involved with commercial office properties. The stock has been deteriorating over the past few months after a strong multiyear rally. This recent weakness is concerning due to the long-term trend-line break. This indicates that a negative change is underway. The rise in interest rates has this stock on the defensive again at a new reactionary low. This is a negative technical configuration and indicative of further weakness.

Simon Property Group

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Simon Property Group

(SPG) - Get Report

is involved with the retailing properties. SPG does not have as much deterioration as BXP, but it is under pressure just the same. The stock is flirting with its long-term trend line and is at risk of breaking to the downside. We would avoid this issue and use strength to sell.

At the time of publication, John Hughes was long Simon Property Group. Hughes began his career at the NYSE in 1989 followed by twelve years running the technical analysis department and co-managing a hedge fund for a New York based brokerage firm. In 2001, John Hughes co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indexes and sectors. Mr. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion.