ETF Outlook: SPDR Dow Jones REIT ETF (RWR)

October 01, 2014 — 10:17 am EDT

Written by Marc Chaikin ->

Every week, Marc Chaikin applies his groundbreaking analysis to an ETF or a sector. Today, he looks at SPDR Dow Jones REIT ETF (RWR)

The SPDR Dow Jones REIT ETF (RWR) was a stock market leader until three weeks ago when it peaked at 86.51. There has been a precipitous sell-off in the RWR as well as many of the component stocks in the ETF. The weakness in the RWR has coincided with a sharp decline in high yield bonds and reflects fears of an early end to ultra-low interest rates. The decline is similar to the price action in May of 2013 when yield oriented REITs experienced a sharp 15% sell-off over 5 weeks and spent three months in a bottoming phase. Then too, high yield bonds reflected higher interest rate concerns.

When an industry group goes from leading the pack to lagging badly, it usually represents a combination of fundamental factors and a change in market psychology. Clearly the psychology regarding the RWR ETF has turned very negative.

The Chaikin Power Bar indicates that only 2 stocks in the RWR have a bullish Chaikin Power Gauge stock rating while only 24 have a bearish rating. This puts RWR next to last in the 20 SPDR Subsector ETFs.

The RWR outperformed the market from early April of 2014 through mid-August. It has been clearly underperforming the S&P 500 Index since early September. This is an ETF to avoid as fears of an earlier than expected hike in interest rates dominate the market. While economic reports, which have been negative in the past few days, have a short-term impact on interest rate psychology, the price action of the SPDR Dow Jones REIT ETF is the most telling clue.

The Chaikin Portfolio Health Check is an excellent tool to help zero in on the weakest stocks in any ETF, and in the SPDR Dow Jones REIT ETF (RWR) there are a number of bearish rated stocks.

By looking at the individual component stocks through the lens of the 20 factor Chaikin Power Gauge stock rating, you can easily find the stocks in the RWR ETF with the weakest price potential over the next 3-6 months. These are the stocks to avoid as they are likely to underperform the RWR as well as the overall market.

The Chaikin Power Grid in Portfolio Health Check (see below) maps stocks and industry groups from strong to weak so you can easily determine the best and worst stocks in any ETF. To find the weakest stocks in the RWR, we look to the bottom left quadrant of the Power Grid (weak Power Gauge stocks in weak industry groups) where we find stocks with the worst potential for price gains over the next 3-6 months. There we see stocks like Essex Property Trust (ESS), Washington REIT (WRE), UDR Inc. (UDR) and Kite Realty Group (KRG).

Over time, weak stocks in weak industry groups will underperform the market.

One stock to avoid in the SPDR Dow Jones REIT ETF is S.L. Green Realty (SLG). SLG is a fully integrated REIT which purchases, rehabs and leases Grade B industrial properties in New York City. Perhaps a less business friendly mayor has contributed to the weakness in the stock.

The stock has lagged the market and the RWR since late July when the Chaikin Power Gauge stock rating turned bearish. Price action has been bearish recently with the stock making new lows and currently oversold. Use any short-term rallies to the 103.5-104 area to sell SLG.