If REITs follow homebuilders, a technical rally may be on the cards

Posted Feb 8th 2008 5:34PM by Michael Panzner
Filed under: Indices, Market Matters, Money and Finance Today, Technical Analysis, Housing

Many people believe that the bursting of the housing bubble was a prelude to a far-reaching property bust, and that few segments of the market will ultimately be spared.

Indeed, reports indicate that the commercial property market, which held up relatively well amid the early decline in home prices, is now in trouble and seems headed for a potentially nasty spill.

Given that, I thought it might be useful to go back and look at the pattern of the S&P 500 Homebuilder's Index in the run-up to the July 2005 peak and beyond, and see how that pattern compares to the recent price action in the Dow Jones Equity REIT index, which is made up of publicly-traded real estate investment trusts.

The conclusion? While not a perfect fit, there are some very interesting overlaps. Under the circumstances, that could indicate the REIT market is setting up for a six-month countertrend rally, spurred, perhaps, by recent aggressive Federal Reserve easing.

Still, even if a rebound does occur, that doesn't necessarily mean it's time to turn bullish on commercial property-related investments. Following the technical correction that took place in the homebuilders' index from late-2006 through early-2007, share prices eventually succumbed to an even more dramatic second-stage collapse.

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.

Tags: real estate, REITs