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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
The property sector has clearly benefitted from the Fed’s expansive monetary policy these past couple of years…
Ultra-low interest rates drove demand higher, causing the home price in some areas to grow upwards of 20%.
But with the easy money slowing down and interest rates set to rise, today I want to see what’s next for the property sector.
While houses are important, they only account for one part of the property sector. Low rates – on top of rapidly rising demand for consumer goods – saw demand (and values) soar for industrial and commercial property too.
That was evidenced by the iShares U.S. Real Estate ETF (IYR) – a broad-based property ETF – more than doubling off its March 2020 low ($56.27).
When we last checked in on IYR (red arrow on the chart below), it had recently struggled to break above resistance (orange line). And declining momentum began to drag its share price lower…
iShares U.S. Real Estate ETF (IYR)
Source: eSignal
However, soon after that IYR bounced and rallied higher. IYR closed out 2021 (A) at its all-time high ($116.89). This coincided with the Relative Strength Index (RSI) going into overbought territory (upper grey horizontal line).
As you can see, IYR then fell heavily along with the broader market. From its December 31 high, IYR dropped 13% in the span of a month.
You can measure the sharpness of the fall by the steep angle of the 10-day moving average (MA – red line) that crossed down below the 50-day MA (light blue line).
Now, with the RSI having fallen all the way from overbought to oversold, we are seeing the first tentative signs of a bounce.
So, what am I expecting from here?
Well, the RSI is key…
When a stock is rallying, the RSI often stays in the top half of its range, which is above the green line (support/resistance). While the RSI might retrace lower within that range, a bounce off support will often see the stock rally to a new high.
It’s the exact opposite when a stock is in a downtrend. Often, the RSI continues to stay in the lower half of its range (below the green line).
It will be hard for IYR’s recent bounce to gain traction unless the RSI can break back above (and stay) in the upper half of its range…
And after such strong selling in January, it would take a huge change in sentiment to see such a move.
If the RSI rallies up to the green line and rebounds lower, then we can expect to see this bounce run out of steam.
That’s why action around the RSI will be key over the coming week.
Let’s take another look at the chart…
iShares U.S. Real Estate ETF (IYR)
Source: eSignal
If the RSI turns down and brings the share price with it, the next test for IYR will be to stay above support (dark blue line). For IYR to form a base from which it can rally, holding this level is key.
A break below support could see a fresh wave of selling come in and push IYR’s shares lower. And that could provide an opportunity to go short.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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