This Dividend Payer Could do Well if Rates Keep Dropping

Douglas Emmett is already breaking above resistance

This morning, I am recommending a bullish trade on Douglas Emmett, Inc. (NYSE:DEI), the self-administered and self-managed real estate investment trust (REIT).

I told you last Friday that my indicators were giving very strong buy signals, and the S&P 500 is up about 1% since then. Well, they are now giving even stronger buy signals — nearly to the point of being overbought.

At the same time, the S&P is once again only a few points away from its prior all-time highs. So, it’s likely that strong resistance will come into play soon.

Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView

As you can see in the chart above, the index has had a nice run since it broke above the top of its August trading range. But its relative strength index (RSI) indicator, in the bottom panel of the chart, is getting up into overbought territory.

As a reminder, traders often use indicators such as the RSI to determine whether a stock or index is in “overbought” or “oversold” territory. Typically, an RSI reading above 70 tells traders that an asset is overbought, or overvalued, while a reading below 30 tells traders that an asset is oversold, or undervalued.

Right now, the RSI reading for the S&P is sitting around the 62 level. That’s not as high as the 70+ readings we saw before the May and August declines, but it’s getting close. So, while there is still room to run, we could see a bit of a pause before new all-time highs.

Now is a good time to recall my two main trading rules: Don’t fight the Fed (or any central bank), and don’t fight the tape (meaning the action in the market).

Rate Cuts and More Cuts to Come

This week, we got some bullish news from the Fed’s European equivalent, the European Central Bank (ECB). The ECB announced a new bond-buying program that is aimed at stimulating the eurozone economy.

The central bank will purchase approximately $22 billion of assets per month for an indefinite period of time. It also cut its main deposit rate by 10 basis points (0.10%), further into negative territory, to -0.5%.

Furthermore, the Federal Reserve is largely expected to decrease its overnight rate by at least 25 basis points (0.25%) at the conclusion of next week’s meeting. This dovish action has given the bulls some renewed enthusiasm.

Bond yields and longer term interest rates are starting to recover from their drop in August, but they are still relatively low. REIT’s are an appealing alternative because they typically provide larger dividends than regular stocks, and lower rates may ultimately benefit the real estate sector.

Breaking Above $42.50

On the chart below, you can see that DEI is trading above both its 50- and 200-day moving averages (MAs) — a bullish sign. The stock also cleared resistance at $42.50 yesterday, though it dropped slightly from its opening price. If it can establish new support at its old resistance level, DEI could head even higher.

Daily Chart of Douglas Emmett, Inc. (DEI) — Chart Source: TradingView

Because its move above $42.50 is new, DEI could come back down to restest support at around $41.50. A trade with a later expiration date may be the best way to take advantage of movement in the stock because it will give DEI time to move up.

Buy to open the Douglas Emmett, Inc. (DEI) Jan. 17th (2020) $45 Calls (DEI200117C00045000) at $0.85 or lower.

To receive further updates on this trade, as well as an alert when it’s time to take profits, sign up for a risk-free trial of Power Options Weekly today.

InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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