Tapering Talk Should Keep Toppling REITs

by Tyler Craig | August 8, 2013 1:40 pm

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[1]) 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[2]), 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.

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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.

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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.

Source URL: https://investorplace.com/2013/08/the-taper-talk-toppled-reits/

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