Tapering Talk Should Keep Toppling REITs

Exploit rising rates with this put spread

   

Since Ben Bernanke’s infamous remarks about tapering quantitative easing on May 22, the world of interest-rate-sensitive stocks has turned topsy-turvy.

Ben’s surprising comments were not so different than yelling “fire” in a crowded theater. During the ensuing bedlam, traders in everything from bonds, REITs and high-yield stocks rushed for the exits en masse.

Prior to the Fed Chairman’s comments, the 10-year Treasury yield (TNX) rested at a lowly 1.9%. Now, as a result of its rapid 37% rise, rates sit at a lofty 2.6%.

The interest-rate ascension spurred a flurry of profit taking in a broad swath of securities, but the downward spiral was particularly vicious for the iShares U.S. Real Estate ETF (IYR), which dropped a quick 18%. Although it staged a respectable rebound, IYR remains below a declining 50-day moving average and is on a nine-day losing streak.

IYRchart Tapering Talk Should Keep Toppling REITs
Click to Enlarge

If you think the absolute performance of IYR looks bad, wait till you have a look at its relative performance.

Remember, the S&P 500 Index has fully recovered from its taper tantrum; as recently as last week, it reached yet another all-time high. Sadly for IYR owners, the beleaguered REIT fund remains a far cry from its May peak. As a result of this considerable divergence, the IYR-SPX ratio has fallen off of a cliff during the past few months to reach a new three-year low.

IYRSPXchart Tapering Talk Should Keep Toppling REITs

If you think the ramp in interest rates and the unwinding of the “reaching for yield” trade will continue, bearish plays on IYR might not be a bad bet.

Buy the Dec 66-62 bear put spread by simultaneously purchasing the Dec 66 put and selling the Dec 62 put for $1.65 or better. The max risk is limited to the initial debit paid, and the max reward is limited to the distance between strikes minus the debit, or $2.35. By going out to December, we allow plenty of time for IYR to descend to the $62 area.

The biggest issue on the timing front is that IYR has already fallen for two weeks straight. Any type of relief bounce would offer a better entry point. Still, if you think a retest of the June lows is looming, a few dollars of profit remain in the offing.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/the-taper-talk-toppled-reits/.

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