Just a few months ago, nobody wanted to touch real estate investment trusts, better known as REITs.
While REITs were a bastion of outperformance in the first half of 2016 thanks to prolonged low rates and rallying real estate prices, they became an unwelcome addition to most investors' portfolios in the second half of the year as market participants braced for higher interest rates from the Fed.
Because REITs are structured to pay out the majority of their income directly to investors in the form of dividends, these high-yield holdings are extremely sensitive to interest rates: when rates go up, the prices investors are willing to pay for yield through assets like REITs goes down. And sure enough, the Fed announced their second rate hike in as many years back in December.
Thing is, Wall Street got REITs wrong.
And after correcting for the last few months, the whole REIT industry has been back to outperforming as investors come to the realization that additional rate hikes are going to come at a snail's pace in this uncertainty-riddled market. That's creating a tradable opportunity for us this week, as some of the most popular REITs push into breakout territory.
To figure out which REITs have the best upside potential, we're turning to the charts for a technical look at five you should buy right now...
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.
Vornado Realty Trust
Up first on the list is Vornado Realty Trust (VNO) , a $20 billion commercial REIT that's showing off a classic continuation setup in shares after rallying more than 20% off its November lows. Put simply, shares could be ready to kick off a second leg higher in February. Meanwhile, Vornado pays a 2.7% dividend yield at current levels.
The price setup in Vornado's chart is an ascending triangle pattern, a price setup that's formed by horizontal resistance up above shares and uptrending support to the downside. Basically, as this big REIT pinballs in between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through $108 - when that happens, we've got a new buy signal in this stock.
Vornado has an extra bit of bullish evidence coming from relative strength, the indicator at the bottom of its chart. Relative strength measures VNO's price performance versus the broader market, and the fact that the indicator has been in an uptrend of its own is a signal that this stock is primed to continue outperforming as long as that trend remains in play. Wait for $108 to get taken out before you jump into this trade.