BALTIMORE (Stockpickr) -- Move over, momentum. The stocks that no one thought would do anything in 2014 are the ones raking in the biggest gains this year. And real estate investment trusts, or REITs, have been one of the biggest winners since the calendar flipped to January.
Since the start of the year, the S&P 500 has dropped 1%, while the Dow Jones Equity All REIT Index, a basket of all publicly traded U.S. REITs, is actually up more than 7.5% over the same stretch.
That's not hugely surprising. Despite some overtures to the contrary, the Fed remains hugely accommodative right now, and rate-sensitive stocks such as REITs are benefiting as cash moves from 2013's big momentum equities to income names. Don't worry if you missed the move in this sector. Right now, there are some attractive trading setups shaping up in some of the biggest REITs once again.
Today, we'll take a technical look at five of them.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
Want to talk about high yield? Then let's talk about Chimera Investment (CIM). Chimera is a mortgage REIT that currently pays out a whopping 11.43% dividend yield. Because of that enormous yield, CIM's price action is very interest-rate driven, and it's been in rally-mode since the start of December.
Chimera has spend the last few months consolidating sideways in a rectangle pattern. The rectangle is a price setup that's formed by a pair of horizontal resistance and support levels that basically "box in" shares between $3 and $3.10. Consolidation patterns like this are common after a big move in price, so it's not surprising to see a protracted rectangle following a strong showing in December and January. Last week's breakout through $3.10 is our buy signal this week in CIM.
Momentum adds some confidence to the staying power of CIM's rally here. Our momentum gauge, 14-day RSI, had been bleeding off over the course of the rectangle pattern, but it broke higher ahead of last week's price move. If you decide to be a buyer in CIM here, keep a protective stop at the 50-day moving average.
Sprit Realty Capital
You don't have to be an expert technical trader to figure out what's going on in shares of Spirit Realty Capital (SRC) -- the setup in shares of this $4 billion commercial real estate landlord is about as simple as it gets. SRC is currently bouncing higher in an uptrending channel, a move that's setting up a textbook buying opportunity this week.
When it comes to price channels, up is good and down is bad. It's really just as simple as that. SRC's channel is bounded by resistance above shares and trend line support below them; those two parallel trend lines provide a high probability range for shares of this stock to trade between. And so, as shares come up on trend line support for an eighth time since August, it makes sense to buy the bounce.
Waiting for a meaningful bounce off of the 50-day moving average (a level that's been a good proxy for trend line support) is crucial for two big reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's also the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring SRC can actually still catch a bid along that line before you put your money on shares.
Vornado Realty Trust
The exact same price setup is in play in shares of Vornado Realty Trust (VNO). Just like SRC, Vornado is trending higher in a price channel -- and shares are testing trend line support for the eighth time since June. That makes VNO buyable on its next bounce off of support. Here again, the 50-day moving average is a good quantifiable proxy for that support line.
An important add-on indicator in Vornado is relative strength, which has been trending higher itself since the calendar flipped over to January. That relative strength uptrend means that this stock is rallying harder than the broad market on the way up, and correcting less deeply on the way down. That's a critical show of strength as anxiety creeps into the market right now.
With the broad market still in the middle of a correction, relative strength is the single most important technical indicator you can have in your toolbox. That means the bounce in VNO carries a lot more weight in April. But don't be a buyer before the next white bar day in price.
Things have looked a lot less auspicious in shares of HCP (HCP) lately. This $18.5 billion healthcare REIT has actually managed to drop more than 22% in the trailing 12 months, dramatically underperforming the broad market -- and the rest of the REIT space -- over that time. But the tides are turning in HCP in 2014.
HCP spend most of the last year in a downtrending channel, the bearish opposite of the patterns we looked at in VNO and SRC. But I mentioned that all trend lines eventually break -- and the breakout above trend line resistance was a major buy signal in HCP at the start of this month. It's an indication that a major change in trend is underway, and buyers have finally wrestled control of this stock.
Shares of HCP are currently correcting after their latest big leg up. That means that investors have a solid opportunity to "buy the dip" here. Speculation over a major merger in HCP and valuation driven buying of its 5.4% dividend yield should help fan some fundamental buying in this name from here.
Last up is $9 billion retail REIT Realty Income (O), a name that's been shining year-to-date. Since Jan. 2, Realty Income has rallied 11%, adding serious upside onto a 5.3% dividend yield. So, how do you trade it from here?
We're coming up on a big buying opportunity in Realty Income thanks to a classic technical buy signal: the inverse head and shoulders pattern. The setup, which indicates exhaustion among sellers, is formed by two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the patterns neckline level, currently right at $42.50.
Why does $42.50 matter so much? It all comes down to buyers and sellers. Price patterns are a good quick way to identify what's going on in the price action, but they're not the reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Realty Income's stock.
The $42.50 neckline level, for instance, is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $42.50 so significant the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. We're looking at a relatively short-term setup here: Realty Income's upside target is at $44.50. For that reason, it's a trade best left to fundamental investors looking for a low-risk entry point, or for traders who can lever up with options.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.