BALTIMORE (Stockpickr) -- Real estate investment trusts, better known as REITs, have been the place to be in 2014. While the broad market has rallied 11.5% since the start of the year, the Vanguard REIT ETF (VNQ) has rallied 25.6% over that same stretch.
Factor in dividends, and VNQ's performance balloons to almost 29% since January.
Why all the outperformance from REITs? It all comes down to interest rates. Put simply, rates have remained lower longer than most market participants could have imagined -- and they're likely to stay that way. That means that REITs should continue to perform well as income investors seek out alternatives in 2015.
It's not just a fundamental macro story at this point; the good news is that we're seeing that bullishness in REITs play out in the charts too.
That's why we're taking a technical look at five breakout REIT trades today.
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.
Select Income REIT
Up first is the Select Income REIT (SIR) , a small-cap trust that invests in single-tenant commercial real estate -- around a third of SIR's portfolio is focused on Hawaii. Despite its holdings, this stock hasn't exactly been in "vacation mode" this year: shares have shed approximately 10% over the course of 2014, missing the S&P's rally by a wide margin, and missing the rest of the REIT space's performance by far worse.
But that could be about to change here. SIR is starting to look "bottomy" in December.
Select Income REIT is currently forming a double bottom pattern, a bullish price setup that looks just like it sounds. The double bottom in SIR is formed by a pair of swing lows that bottom out at approximately the same price level. The buy signal comes on a breakout above the peak at $24.50 that separates the lows. Shares are within grabbing distance of that level this week.
Momentum, measured by 14-day RSI, adds some extra confidence to upside in SIR. That's because our momentum gauge has been making higher lows since SIR's first price bottom in October, an indication that buying pressure is starting to build again in shares. Still, wait for $24.50 to get taken out before you buy.
Pebblebrook Hotel Trust
2014's price action has been a lot kinder to Pebblebrook Hotel Trust (PEB) , a $3 billion hotel owner that's structured as a REIT. Since the first session in January, PEB has knocked it out of the park, rallying more than 42%. But don't worry if you've missed the move so far -- there's still upside in PEB this month thanks to a textbook breakout that got confirmed with yesterday's close.
PEB had been forming a rounding bottom pattern, a bullish price setup that typically forms at the bottom of a downtrend. The rounding bottom indicates a transition in control of shares from sellers to buyers, and even though the setup in PEB wasn't exactly textbook, the trading implications are exactly the same. The breakout signal came on a push through prior resistance at $43, a level that got definitively taken out during yesterday's session, the first day that shares traded above $43 from the open through the close. Now, we've got a big buy signal.
If you decide to be a buyer here, I'd recommend putting a protective stop on the other side of the rounding bottom in PEB. That means parking your stop at $41. If shares violate that $41 line in the sand, you don't want to own this hotel stock anymore.
Small-cap REIT Alexander's Inc. (ALX) is a unique real estate landlord -- the firm just owns a handful of properties concentrated in the greater New York area. The good news is that you don't need to be an expert technical trader to see why ALX looks buyable here. This stock has been bouncing its way higher in a well-defined uptrend all year long, so as shares test support for a fourth time since the summer, it makes sense to buy the next bounce higher…
Waiting for a bounce is important for two key reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's 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 ALX can actually still catch a bid along that line before you put your money on shares.
The side indicator to watch in ALX is relative strength, which has been turning higher, an indication that this stock is outperforming the broad market in good times and bad ones. As long as that relative strength uptrend remains intact, shares of ALX should keep outperforming the S&P 500.
Columbia Property Trust
Atlanta-based REIT Columbia Property Trust (CXP) is another name that's in breakout mode this week. While shares of this commercial real estate company are near breakeven on the year, the chart has actually spent much of the year basing in a classic inverse head and shoulders pattern. This week, with a breakout signal triggered on Monday, we've got a big buy signal in CXP.
The inverse head and shoulders pattern in Columbia Property Trust is a bullish reversal setup that indicates exhaustion among sellers. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal came on a breakout above the pattern’s “neckline” level at $25.50.
Momentum also looks bullish in CXP here -- our 14-day RSI line has been making higher lows during a stretch of time when price wasn't. Since momentum is a leading indicator of price, this breakout looks like a good buying opportunity for traders to take. If you decide to be one of them, I'd suggest keeping a stop at the 50-day moving average.
Liberty Property Trust
We're seeing the exact same setup in shares of Liberty Property Trust (LPT) right now -- the major difference is that this mid-cap landlord hasn't broken out yet. Like CXP, Liberty is currently forming an inverse head and shoulders pattern, in this case with a neckline level at $36. When that $36 level gets exceeded, we've got a buy signal in LPT.
Why all of that significance at that $36 level? It all comes down to buyers and sellers. Price patterns like the inverse head and shoulders are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for LPT's stock.
The $36 resistance level was a price where there has been an excess of supply of shares; in other words, it's a spot 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 $36 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Our resistance level is getting tested this week -- but it's still crucial to wait for the breakout before you buy it.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in the names mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory that returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji