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Reply with quote  #1 
These are the facts.



Technicals:

1. IYR (commercial real estate) was one of the strongest sectors in this bull market from 2003. It was also very strong in the rally from June 2006 low (based on ratio with SPX).

2. It had a speculative blowoff during early Feb, and topped a week before the market.

3. Sentiment in the sector was exuberant during early Feb's merger mania.

4. While the market bounced back to new highs from March lows, IYR segment did not get any wind behind its sail. This is a sign of weakness.





Fundamentals:

1. In previous cycles, commercial real estate topped about 1.5 years after residential real estate.

2. There are signs of overconstruction in CRE space now.

3. Same lending constraints crippling residential housing also started to affect CRE now.



Immediate condition:

IYR is a combination of three kinds of stocks - apartment REITs, shopping mall REITs and office REITs.

1. Lately, all apartment REITs, which were the weakest among IYR components due to direct link to housing bubble, started to sell off and break below trading range.

2. Last week, apartment REITs rallied somewhat, while the strongest components such as SPG started to sell off.




Most probable scenario for future:


REITs return most of their earnings back to investors as dividends. Therefore, their valuation is easiest to do. Their dividend returns should be (treasury rate + risk premium). Even if the long term treasury interest rates eventually fall to 2.5%, taking a historical average risk premium of 6.5%, I expect the REITs to return 9% to be reasonable investments. Right now, REITs return 3%, while treasury rates are 4.7%. Therefore, REITs are selling at -1.7% risk premium, or 8.2% below historical rate.

If mean reversion takes REITs to other end of the pendulum, return on REITs could be ~8.2% above 9%=17% before getting back to historical rate of 9%.

If REITs return to historical norms and their earnings do not fall (highly unlikely), IYR should fall to ~29. If mean reversion principle takes them to the other extreme before returning to historical norms, IYR should fall to 14.5.


Based on all technical and fundamental conditions listed above, I believe SRS (ultra inverse IYR) is an excellent investment.


IYR, BKX, RTH and HGX are four sectors that did not match SPX high and are leading on the downside. I conclude from their resumed downward march that the market has more work to do south of border.

Best to all,





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fib_1618

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Reply with quote  #2 
Quote:
2. It had a speculative blow off during early Feb, and topped a week before the market.

Since there wasn't any internal divergence with the price pattern, this observation is (fundamental) opinion, and not fact. You can not - under any circumstances - have a speculative blow off of any kind unless you have internal breadth divergences with the price pattern itself during such a rally phase. It's also worth noting that the IYR actually topped on February 8th - a full 3 weeks before "the market" did.

Quote:
3. Sentiment in the sector was exuberant during early Feb's merger mania.

I would like to challenge this statement. Nowhere in USA Today did I see any articles over the last year about how great the real estate sector has been. All I have seen is how terrible housing has been. Can you then provide a source for this information?

Quote:
4. While the market bounced back to new highs from March lows, IYR segment did not get any wind behind its sail. This is a sign of weakness.

Actually, it's a sign of a high level consolidation price pattern in which you might see another leg down to test the longer term rising bottoms line at around the 82.50 level, but as long as the internals remain buoyant as they have, this will keep prices from decaying in any meaningful way for the unforeseen future.

As far as the rest of your post is concerned, this is your personal forecast on what you believe will happen and not necessarily what money believes is the actual case.

And your opinion has been duly noted.

Fib


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Reply with quote  #3 
Fib,

Thank you for your comments.

In a five year weekly chart, IYR stayed within a price channel. It broke out of the channel upwards during early Feb in a parabolic pattern. It was the same time, when VNO and private equities were bidding to buy EQP. That was considered speculative blowoff in my model. Right after the news came out, IYR gapped inside the channel, suggesting that the channel lines were respected, and then hanged around the same price range for another approx. two weeks before dropping down. If you look at the components, some of them started to fall below before IYR gapped up. ASN, a weak member of IYR for one year, is one example that was leader on the downside.


I have three measures of sentiment to determine chances for long-term peak- (i) big mergers, (ii) news, (iii) ordinary people. Big merger (plus bidding war) did happen in Feb., and another one is due now (check PSP). As far as news is concerned, I never heard about 'real estate bubble', but 'housing bubble'. All the negative talks were about residential housing and not shopping malls/hotels/offices, and you know that better than I do. Lastly, many of my friends (ex housing investors) are now talking about buying Marriott time-shares (equiv. hotel REIT), etc. I have seen many news stories on why commercial real estate is immune from residential problems.



ASN and its peers are breaking down again. I do not know how you exactly measure money flow, but in my picture money is leaving the sector, first through weak members and then will be through strong ones. Interestingly, even a strong member SPG looks weak already. The problem with your method of counting sectoral advance-decline is that it considers all stocks in the same manner, without showing any respect for strong or weak stocks. The market does differentiate between those groups, based on the fundamental strengths of subsectors or companies. All HGX (or IYR) components are not equal, as can be easily said from their balance sheets or markets.

Mean reversion is a viable principle for long term. What's wrong with it??

Regards,
Greenie


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fib_1618

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Reply with quote  #4 
Quote:
In a five year weekly chart, IYR stayed within a price channel. It broke out of the channel upwards during early Feb in a parabolic pattern....Mean reversion is a viable principle for long term.

OK, shown below is a five year chart of the IYR with the price channel you've noted marked on the chart. I've also applied a 34 week MA Bollinger Band to the pattern to provide a longer term "mean" to the pattern.

Some observations from the technical side:

1) You'll notice that the price pattern gaped up above the upper end of the trend channel in mid November of 2006. However, this move above and away from the previous trend was not accompanied by expanding volume which suggested that either a failure would occur, or minimally speaking, a snap back to the breakout line would be needed to test the conviction of this same move. You will notice that a retest did occur into the end December period before again moving higher.

2) The rally from the beginning of this year did not enjoy much in the way of volume expansion which is a key prerequisite for a speculative blow-off. The increase in volume actually came at the top with the range close reversal and peaked with the price pattern reversal on the second retest of the previous upper trend channel line.

3) Next you'll note that through yesterdays action that the price pattern seems to be trading back within the previous trend channel which suggests that "something different" might be happening with the longer term pattern and why the reference to another possible leg down near term was mentioned earlier in the thread.

4) Also of note is the way the price pattern has been able to move back to its mean and found support since the start of the trend channel back in May of 2004. Will it hold this time as it has in the past? With the price action having moved back within the trend channel, the chances of this happening this time around are decreased by an appropriate technical amount based on all things being equal.

5) Tuesday's action saw a move to the downside as was the technical expectation because of the reasons given above. However, volume is woefully low if one were looking for a bearish continuation to the downside. But then again, this is a weekly chart, and it's early in the week.

The bottom line from a technical standpoint is that the trend of this chart pattern remains higher, but the longer it remains back within the trend channel, the better the chance that a test of the lower Bollinger Band will occur. If this does happen, and the bounce off the lower band is not able to move above the 34 week "mean", then this will be your first real confirmation that a change of trend is actually underway.

Quote:
The problem with your method of counting sectoral advance-decline is that it considers all stocks in the same manner, without showing any respect for strong or weak stocks.

Actually, the beauty of considering all the components in this manner is that it gives you a better way to weigh an overall sectors relative strength as compared to the general marketplace, with no prejudice to how big or how small your weight is, only that money regards the sector as being worthy of attention (sometimes positive, sometimes negative) to ones own money making pursuits.

Fib




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"What we see depends mainly on what we look for" - John Lubbock

"The eye sees only what the mind is ready to comprehend" - Henri Bergson

“Answers are easy; it’s asking the right questions which is hard” - Dr. Who - 1977

"You know the very powerful and the very stupid have one thing in common - they don't alter their views to fit the facts, they alter the facts to fit their views (which can be uncomfortable if you happen to be one of the facts that needs altering)" - Dr. Who - 1977

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Reply with quote  #5 
Thanks Fib. I guess the main difference between our trend-lines is that I draw them in the log scale instead of linear, because the time-frame is longer than few weeks. Please take a look at the following chart from Tim Knight's blog, which is similar to what I had at that time:

http://bp0.blogger.com/_DC_WvCGCWQ8/RdTmoG_y1AI/AAAAAAAABJg/8ejgI9h7wdc/s1600/0215-iyr.jpg

Rest of your points are valid and important. I need to do some backtesting to incorporate them in my work. Let's have this IYR as a real-time test of how things progress.



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fib_1618

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Reply with quote  #6 
A close up of the last several months of action showing how the weekly price pattern attempted to "hold the (trend) line", came down to test the 34 week moving average (dotted line), found support, then found resistance at the same trendline, before collapsing this week.

Fascinating stuff...where there is perceived chaos, there seems to be some (technical) order to all of this.

Fib




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"As for it being different this time, it is different every time. The question is in what way, and to what extent" - Tom McClellan

"An economist is someone who sees something happen, and then wonders if it would work in theory" - Ronald Reagan

"What we see depends mainly on what we look for" - John Lubbock

"The eye sees only what the mind is ready to comprehend" - Henri Bergson

“Answers are easy; it’s asking the right questions which is hard” - Dr. Who - 1977

"You know the very powerful and the very stupid have one thing in common - they don't alter their views to fit the facts, they alter the facts to fit their views (which can be uncomfortable if you happen to be one of the facts that needs altering)" - Dr. Who - 1977

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Darris

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Reply with quote  #7 
For technical consideration, there are some potential bullish aspects occurring in the IYR ETF proxy, IMO.  We are presently testing an uptrending 200 day MA, and still above the 50 week EMA.  IYR volume and dollar flow are starting to severely wane in respect to price damage this past week.  The gap up from Nov 17-20, 2006 could be viewed as filled on Friday May 18, 2007, but maybe a few dimes off.  Conclusion: a reasonable technical expectation over the next 20 trading days or less, would be a test of the 50 day MA.  Real Money Test: If the IYR ETF can retest Friday's low or get closer to the Nov 2006 gap up around $80.00 Monday or Tuesday this week, I will take a stab with the purchase of the IYR ETF and the June 80 or 85 Calls, FWIW.  Have a good weekend.
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Darris

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Reply with quote  #8 
Follow up. Took longer than expected, but entered long IYR ETF at $80.02.  Bidded the June 84 calls at a quarter,but they would not fill even when we printed the $79.72 low of the day.  May just pass on the calls now. Target sell 84 to 86 on IYR.
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wyocowboy

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Reply with quote  #9 

 For what it is worth, there is pretty heavy insider buying on a lot of REIT's - you might check out GGP,CHC,CLP,RSO,NCT, hotel investment companies MHGC and AHT, and even CALC and OHB. There are plenty of reasons for insiders to sell stock, but there is only one reason they buy - they expect to make money.

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Darris

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Reply with quote  #10 
wyocowboy, thanks for the suggestions.  I will certainly investigate those.  Have a good day.
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Darris

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Reply with quote  #11 
Closed the IYR ETF long position out this morning at $86.09 for $6.07 per share profit since we closed yesterday above the 50 day MA.  Not planning to trade IYR any further.  Have a good day.
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Reply with quote  #12 
Good trade Darris. Still holding previous SRS positions and added some at 77. All long term positions.

Let's see how things go on from here.
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