Why REITs Looks Interesting To Me

One setup that stood out to me recently was the weekly chart of the Vanguard REIT ETF ($VNQ).  While U.S. equities hit a fresh high last week, REITs are basically flat for 2015. With the recent rise in U.S. interest rates, REITs have seen some rough patches over the last several weeks as REITS have a low correlation to bond yields. In fact, the 60-week correlation between $VNQ and the 10-year Treasury yield is -0.94. I’d call that pretty negatively correlated! However, REITs have still outpaced long-term bonds with the ratio between $VNQ and $TLT sitting near its high from the last two years.

Below is a weekly chart of VNQ going back to mid-2012. It’s had a nice up trend and is currently a little less than 10% off its high that was set in 2014. While it began to show signs of a down trend, setting a lower high and then a lower low, price has bounced back and recovered the low from March. This bounce has occurred right at the 50-week Moving Average, which has helped ‘define’ the up trend over the last several years.

We are also seeing the previous low in the Relative Strength Index (RSI) also holding as support. This is a good sign that momentum may remain in a bullish range and price is in fact not about to start a new down trend. Another momentum tool that I don’t show very often on the blog but I’ve included on this chart is the Williams %R. This indicator is essentially the inverse of the Stochastic Oscillator. It essentially looks at price over a set period of time (16 weeks in this chart) and it’s position relative to the highest high over that same period. I find it interesting when the %R breaks below -80 on a weekly chart as it often has been associated with prior lows in price. We saw an example of this most recently last September and before that, December 2013.

VNQIf bond yields continue to come off their recent run then we could see the negative correlation to REITs work in their favor as $VNQ recovers and holds above its 50-week Moving Average. But if this slight drop in yield is just a pause and rates keep rising then we may see REITs break this Moving Average support and it’s prior 2015 low.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

 

Does Trading Volume Support the Trend in Stocks?

The last post I wrote took a long-term look at the S&P 500 from a monthly viewpoint. Today I want to look at the S&P 500 SPDR ETF ($SPY) on a daily chart but focus on volume and what it has to say about the current trend.

I’m using the S&P ETF rather than the index itself to get a ‘truer’ view of volume flow. There are two indicators I want to look at when analyzing volume: On Balance Volume (OBV) and Accumulation/Distribution. Both of these tools take into account the raw amount of shares traded but the way it’s used is different for each tool.

Let’s first look at On Balance Volume. This indicator simply adds the number of shares traded when $SPY is positive for the day and subtracts the number of shares traded when the ETF has negative performance for a day. This helps us see if there is more volume being traded on up or down days. When $SPY is being bid higher we’d prefer to see more activity and on down days see fewer shares traded. Now of course this doesn’t necessarily mean there are more or less traders involved on each days, as one person can buy 100,000 shares and it would have the same impact to volume as 100 investors trading a 1,000 shares. But it’s accessing the amount of activity that volume can help us see.

Currently, for 2015, we are seeing a larger number of shares exchanging hands on down days than up days as On Balance Volume has been declining since its late-December peak. This is creating a negative divergence with price as $SPY has been advancing (albeit at a choppy pace) for the bulk of the last four months.

SPY volumeNext we have the Accumulation/Distribution indicator. Like OBV, the Accum/Dist tool uses volume in its measurement. However the difference is it doesn’t simply add and subtract volume based on if price finishes higher or lower on the day. Instead, this volume indicator looks at the range in which price traded that day and whether it closed in the higher or lower end of that range. At the start of this year we had a series of decent amount of volume being traded with the close on $SPY being in the top of the daily range. This pushed the Accumulation/Distribution indicator higher through January and February. However, since March it’s leveled out – similar to what’s taken place in price.

So what does all have to say about volume and whether it supports the current price action in the equity market? I think we currently have a mixed bag. On the surface we have less trading activity on up days for the S&P 500 ($SPY) than on down days shown by the OBV indicator, but at the same time price has been able to stabilize itself intraday and close near the higher end of its range as shown in the Accum/Dist data. At a quick glance, 2011 appears to have displayed a similar type of movement. With more shares traded on down days going into the intra-year peak in May. We’ll see if the bearish action in price that took place in ’11 repeats itself during this year. Just because volume diverged in 2011 doesn’t mean we see a near-bear market in 2015. I”ll be watching price more closely for signs of distress.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

A Look At the Monthly Chart of the S&P 500

I noticed something interesting yesterday while going through my charts, and that was the monthly chart of the S&P 500 ($SPX). When I do my Technical Market Outlook and discuss momentum I show the daily chart of the S&P along with the Relative Price Index and MACD indicators. These are two well-known and commonly used measures of momentum in technical analysis. Today let’s take a look at what they are showing on the monthly chart.

What I noticed first was the degree of separation between two lines of the MACD oscillator. The MACD indicator is made up of the difference between two Exponential Moving Averages as well as the average of the MACD line itself which creates the ‘signal’ line (you can read more about the MACD indicator here). Many traders have noticed the crossover that’s taken place in the MACD on the monthly chart and how this resembles what took place in 2007. What’s interesting to note today is how separated the fast and slow lines have become, which is displayed in the histogram portion of the indicator in the chart below. In fact, they haven’t been this far apart since ’07, ’00, and ’98, as marked by the vertical dotted red lines. The whipsaw of the MACD in 2011 is often used to discredit this momentum tool’s accuracy, and rightfully so. But in 2011 we did not see the histogram (which measures the distance between the two MA’s) decline by this amount.

Turning the focus to the Relative Strength Index (RSI), which is my personal favorite measure of momentum, the picture does not look as bearish. At least not yet. We often look for divergences in the RSI but I’ve found that looking for breaks of support after the RSI has been above 70 has also been an interesting tool to use. We remain above the prior lows of around 65 in the RSI indicator. The fact that the RSI has stayed elevated is a positive long-term sign, it’s when things begin to breakdown that traders often begin to grow concerned.

spx monthly

So when it comes to momentum on the monthly chart of the S&P 500, it seems we have a house divided. The MACD oscillator is showing signs that things are slowing down in the U.S. equity market as price is unable to keep its momentum rising. But the RSI has been able to remain above its support level. All while price itself has been able to stay above its own 20-month Moving Average which has helped defined the current (and prior) up trend. While the focus is often on what’s taking place on a daily basis I like to keep track of what’s also occurring on the big picture as well – and currently things look mixed at best.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.